Two stylised facts have been reported by literatures on inventories and business cycles. The first is the positive correlation between sales and inventory investments. As a result, output is empirically more volatile than sales, hence the inventory investment amplifies rather than mutes the variation in output. The second is the slow adjustment speed of inventory-sales ratio. The most prevailing inventory theory, the production smoothing model, does not convincingly reproduce the first salient fact when demand shocks are given. This is because the model is based on the assumption that manufacturer's finished goods inventories are used to smooth the production level by mitigating sales fluctuations since manufacturer's production function has decreasing returns to scale. Because aggregate inventories held by retail and whole sale sectors are empirically larger than manufacturer's finished goods inventories, this thesis introduces an alternative inventory theory, the (8, s) model, which is widely adopted by retail sectors. Under the (8, s) rule, retailers have increasing returns to scale so that it is efficient to have procyclical inventory movements. A general equilibrium model of retail sectors together with producers is constructed. Though the specification is kept simple, the model allows analysing the influence of not only sales but also retailer's mark-up and the real interest rate on inventory movements. Two stylised facts are reproduced with a production technology shock but not with a demand shock since the production smoothing effect of producers dominates the (8, s) policy. Beyond the two stylised facts, empirical evidence of countercyclical inventorysales ratio, procyclical retailer's mark-up and the weak influence of interest rate is presented. Numerical analysis is conducted to investigate which type of shocks is better in reproducing the most of those evidences.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:490596 |
| Date | January 2008 |
| Creators | Tsutsui, Kei |
| Publisher | University of East Anglia |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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