Journal Article

(<i>S, s</i>) Inventory Policies in General Equilibrium

Jonas D. M. Fisher and Andreas Hornstein

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 67, issue 1, pages 117-145
Published in print January 2000 | ISSN: 0034-6527
Published online January 2000 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00124
(S, s) Inventory Policies in General Equilibrium

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We study the aggregate implications of (S, s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S, s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation in the decision to order and variation in the rate of sale through the pricing decisions of retailers. We find that both mechanisms must operate to reconcile observations that orders are more volatile than, and inventory investment is positively correlated with, sales, while remaining consistent with other salient business cycle characteristics. The model exhibits strong amplification for some shocks and persistence to a limited extent.

Journal Article.  0 words. 

Subjects: Economics

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