Microeconomic Inventory Adjustment:Evidence from U.S. Firm-Level Data

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Microeconomic Inventory Adjustment:Evidence from U.S. Firm-Level Data

March 2000 Number 101

JEL classification: D24, E22, E37

Authors: Jonathan McCarthy and Egon Zakrajšek

We examine inventory adjustment in the U.S. manufacturing sector using quarterly firm-level data over the period 1978-97. Our evidence indicates that the inventory investment process is nonlinear and asymmetric, results consistent with a nonconvex adjustment cost structure. The inventory adjustment process differs over the business cycle: for a given level of excess inventories, firms disinvest more in recessions than they do in expansions. The inventory adjustment process has changed little between the 1980s and 1990s, suggesting that recent advances in inventory control have had little effect on adjustment costs. Nevertheless, the optimal inventory-sales ratio in the durable goods sector has declined significantly during our sample period.

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