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(S,s) Inventory policies in general equilibrium
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(S,s) Inventory policies in general equilibrium

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  • Jonas D. M. Fisher
  • Andreas Hornstein

Abstract

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.

Suggested Citation

  • Jonas D. M. Fisher & Andreas Hornstein, 1998. "(S,s) Inventory policies in general equilibrium," Working Paper 97-07, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:97-07
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    More about this item

    Keywords

    Inventories;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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