Input and Output Inventories in General Equilibrium
Iacoviello, Matteo, Fabio Schiantarelli, and Scott Schuh. “Input and Output Inventories in General Equilibrium”. Boston College Working Papers in Economics 658, 2007.
We build and estimate a two-sector (goods and services) dynamic general equilibrium model with two types of inventories: finished goods (output) inventories yield utility services while materials (input) inventories facilitate the production of goods. The model, which contains neutral and inventory-specific technology shocks and preference shocks, is estimated by Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-target ratios. When estimated over subperiods, the results suggest that changes in the volatility of inventory shocks, or in structural parameters associated with inventories, play a minor role in the reduction of the volatility of output.