Inventories and Business Cycles in Major Industrialized Countries

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Economists have long recognized the important role for inventories in explaining business cycles. Abramovits, for example, argued in 1950 that inventories were a key factor for U.S. business cycles. A little later Mathews emphasized that business cycle turning points, especially downturns, are to a large extent accounted for by changes in inventory investment. Recently, this has been documented for the U.S. with up-to-date statistics, by Blinder in 1981 and Blinder and Holtz-Eakin in 1986. In an atheoretical accounting sense, over half the peak to trough fall in GNP in post-1929 U.S. recessions has typically been attributable to changes in inventory investment. No general agreement exists, however, as to why inventory investment is so pro-cyclical. This provides the motivation for the present research which seeks to integrate models of inventory behavior with theories of the business cycle. The role of inventories in business cycles will be evaluated using data from seven industrialized countries - Canada, France, West Germany, Italy, Japan, the U.K. and the U.S. - emphasizing the countries for which the data are best - Canada, Japan, the U.K. and the U.S. The research will first consider how representative is the well-documented U.S. experience on the behavior of inventories over the cycle. It will then estimate structural inventory models, for aggregate economies as well as for two-digit manufacturing. Broadening the data used for inventory analysis to include those from countries other than the U.S. seems likely to help us discern general patterns, increase our power to discriminate between otherwise indistinguishable hypotheses, and sharpen our estimates of key parameters.The results should be of interest to a wide audience, not only "inventory" specialists.