Inventories, Oil Shocks, and Macroeconomic Dynamics

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This research will generate new methods for studying the behavior of inventories and new insights into the causes and propagation mechanism of business cycles. The particular goals are to develop an appropriate framework for applying the linear-quadratic inventory model to data that exhibit long-run stochastic trends. We also intend to use this method to study different two-digit manufacturing sectors to characterize the response of inventories, production, and final sales to an oil price shock. We will also trace out the intersectoral and intertemporal linkages that may be involved in propagating the shock into an economic recession. Finally, we plan to re-examine the empirical evidence on the role of monetary policy in accounting for the historical correlation between oil price shocks and economic activity.