What Inventory Behavior Tells Us about Business Cycles

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Staff Reports

What Inventory Behavior Tells Us about Business Cycles

November 1999Number 92

JEL classification: E22, E32

Authors: Mark Bils and James A. Kahn

Manufacturers' finished goods inventories are less cyclical than shipments. This requires marginal cost to be more procyclical than is conventionally measured. In this paper, alternative marginal cost measures for six manufacturing industries are constructed. These measures, which attribute high-frequency productivity shocks to procyclical work effort, are more successful in accounting for inventory behavior. Evidence is also provided that the short-run slope of marginal cost arising from convexity of the production function is close to zero for five of the six industries. The paper concludes that countercyclical markups arising from a procyclical shadow price of labor are chiefly responsible for the sluggishness of inventories.

Available only in PDF PDF

49 pages / 291 kb

For a published version of this report, see Mark Bils and James A. Kahn, "What Inventory Behavior Tells Us about Business Cycles," American Economic Review90, no.3 (June 2000): 458-81.

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