Asymmetric Inventory Dynamics and Product Market 2017-11-29 Search Asymmetric Inventory Dynamics and Product Market Search Linxi Chen November 29, 2017 Asymmetric Inventory Dynamics and Product Market Search Linxi Chen November 29, 2017 1 / 46
Asymmetric Inventory Dynamics and Product Market 2017-11-29 ...indeed, to a great extent, business cycles are inventory fluc- Search tuations. Alan Blinder, 1981 ...indeed, to a great extent, business cycles are inventory fluc- tuations. 1. Economists knew inventory movements Alan Blinder, 1981 2 / 46
Asymmetric Inventory Dynamics and Product Market 2017-11-29 ...indeed, to a great extent, business cycles are inventory fluc- Search tuations. Alan Blinder, 1981 Everything that needs to be said has already been said. But since no one was listening, everything must be said again. Andre Gide ...indeed, to a great extent, business cycles are inventory fluc- tuations. 1. Economists knew inventory movements Alan Blinder, 1981 Everything that needs to be said has already been said. But since no one was listening, everything must be said again. Andre Gide 2 / 46
Importance of Inventory Investment Asymmetric Inventory Dynamics and Product Market Importance of Inventory Investment Real GDP Decomposition, 1954−2007 2017-11-29 Search GDP Level GDP Growth GDP Growth Variance 100 100 100 80 80 80 60 60 60 percent percent percent 40 40 40 Importance of Inventory Investment 20 20 20 0 0 0 Real GDP Decomposition, 1954−2007 Consumption Fixed Investment Inventory Investment Government Expenditure Net Export Covariance GDP Level GDP Growth GDP Growth Variance 100 100 100 1. Inventory investment is a component of GDP 2. Clarification: inventory means stock, II means the change (flow) 80 80 80 3. and it’s known as CIPI, change in private inventory 60 60 60 percent percent percent 40 40 40 20 20 20 0 0 0 Consumption Fixed Investment Inventory Investment Government Expenditure Net Export Covariance 3 / 46
Introduction Asymmetric Inventory Dynamics and Product Market Introduction 2017-11-29 Document and explain two new stylized facts: Search 1 Inventory investment accounts for much larger share of GDP change in recessions than expansions 2 Inventory-sales ratio lags GDP for four quarters Standard inventory models (e.g. Wen 2011) fail to account for them Introduction This paper: Based on stockout-avoidance motive for inventory (Kahn 1987). Augment with product market search Matches the two new stylized facts and existing ones. Document and explain two new stylized facts: Inventory investment accounts for much larger share of GDP change 1 in recessions than expansions Inventory-sales ratio lags GDP for four quarters 2 Standard inventory models (e.g. Wen 2011) fail to account for them This paper: Based on stockout-avoidance motive for inventory (Kahn 1987). Augment with product market search Matches the two new stylized facts and existing ones. 4 / 46
Fact 1: Asymmetric Share of Inventory Investment Asymmetric Inventory Dynamics and Product Market Fact 1: Asymmetric Share of Inventory Investment 2017-11-29 Search Inventory investment accounts for 72% of GDP decline in recessions This part motivates research on inventory But only 8% of GDP increase in expansions This part is mostly ignored Fact 1: Asymmetric Share of Inventory Inventory-investment-to-GDP ratio is negatively skewed Stylized facts are determined by behaviors in expansions Investment Inventory investment accounts for 72% of GDP decline in recessions This part motivates research on inventory But only 8% of GDP increase in expansions This part is mostly ignored Inventory-investment-to-GDP ratio is negatively skewed Stylized facts are determined by behaviors in expansions 5 / 46
Fact 1: Inventory Investment in the 1981 Recession Asymmetric Inventory Dynamics and Product Market Fact 1: Inventory Investment in the 1981 Recession Billions of 2009 Dollars, Peak to Trough 1981 Recession 2017-11-29 100 Search 0 −100 Fact 1: Inventory Investment in the 1981 −200 Billions of 2009 Dollars, Peak to Trough 1981 Recession 1981q3 1981q4 1982q1 1982q2 1982q3 1982q4 date Recession GDP Consumption Fixed Investment Inventory Investment 100 Figure: GDP and its Components,Change Relative to Peak 0 −100 −200 1981q3 1981q4 1982q1 1982q2 1982q3 1982q4 date GDP Consumption Fixed Investment Inventory Investment Figure: GDP and its Components,Change Relative to Peak 6 / 46
Fact 1: Inventory investment In the 1982-1990 Expansion Asymmetric Inventory Dynamics and Product Market Fact 1: Inventory investment In the 1982-1990 Expansion Billions of 2009 Dollars, Trough to Peak 1981−90 2017-11-29 2500 Search 2000 1500 1000 500 Fact 1: Inventory investment In the 1982-1990 0 Billions of 2009 Dollars, Trough to Peak 1981−90 1982q3 1984q3 1986q3 1988q3 1990q3 date Expansion GDP Consumption 2500 Fixed Investment Inventory Investment Figure: GDP and its Components,Change Relative to Trough 2000 1500 1000 500 0 1982q3 1984q3 1986q3 1988q3 1990q3 date GDP Consumption Fixed Investment Inventory Investment Figure: GDP and its Components,Change Relative to Trough 7 / 46
Fact1: Peak-to-trough Declines Asymmetric Inventory Dynamics and Product Market Fact1: Peak-to-trough Declines Peak Trough Inven.Inves. GDP Share 2017-11-29 1948:4 1949:4 -40.66 -30.68 132% Search 1953:2 1954:2 -24.47 -62.77 39% 1957:3 1958:2 -21.19 -84.98 25% 1960:2 1961:1 -21.38 -9.06 236% 1969:4 1970:4 -35.84 -7.19 498% 1973:4 1975:1 -80.06 -169.95 47% 1980:1 1980:3 -67.26 -142.02 47% 1981:3 1982:4 -120.51 -169.73 71% Fact1: Peak-to-trough Declines Peak Trough Inven.Inves. GDP Share 1990:3 1991:1 -46.87 -118.38 39% 2001:1 2001:4 -24.09 -40.20 59 % 2007:4 2009:2 -213.07 -636.23 33% Avg*:72% Table: Peak-to-trough Declines in All Postwar Recessions. 1948:4 1949:4 -40.66 -30.68 132% Note: Units in billions of 2009 dollar, annualized quarterly 1953:2 1954:2 -24.47 -62.77 39% 1957:3 1958:2 -21.19 -84.98 25% 1960:2 1961:1 -21.38 -9.06 236% 1969:4 1970:4 -35.84 -7.19 498% 1973:4 1975:1 -80.06 -169.95 47% 1980:1 1980:3 -67.26 -142.02 47% 1981:3 1982:4 -120.51 -169.73 71% 1990:3 1991:1 -46.87 -118.38 39% 2001:1 2001:4 -24.09 -40.20 59 % 2007:4 2009:2 -213.07 -636.23 33% Avg*:72% Table: Peak-to-trough Declines in All Postwar Recessions. Note: Units in billions of 2009 dollar, annualized quarterly 8 / 46
Fact 1: Trough-to-peak Increases Asymmetric Inventory Dynamics and Product Market Fact 1: Trough-to-peak Increases Trough Peak Inven. Inves. GDP Share 2017-11-29 1949:4 1953:2 33.28 588.80 6% Search 1954:2 1957:3 20.94 345.24 6% 1958:2 1960:2 22.89 320.36 7% 1961:1 1969:4 30.15 1613.21 2% 1970:4 1973:4 76.25 754.12 10% 1975:1 1980:1 33.01 1232.47 3% 1980:3 1981:3 115.93 279.97 41% 1982:4 1990:3 84.35 2490.81 3% Fact 1: Trough-to-peak Increases 1991:1 2001:2 7.16 3844.74 0.1% Trough Peak Inven. Inves. GDP Share 2001:4 2007:4 120.34 2286.52 5% Avg: 8% Table: Trough-to-peak Increases in All Postwar Expansions Note: Units in billions of 2009 dollar, annualized quarterly 1949:4 1953:2 33.28 588.80 6% 1954:2 1957:3 20.94 345.24 6% 1958:2 1960:2 22.89 320.36 7% 1961:1 1969:4 30.15 1613.21 2% 1970:4 1973:4 76.25 754.12 10% 1975:1 1980:1 33.01 1232.47 3% 1980:3 1981:3 115.93 279.97 41% 1982:4 1990:3 84.35 2490.81 3% 1991:1 2001:2 7.16 3844.74 0.1% 2001:4 2007:4 120.34 2286.52 5% Avg: 8% Table: Trough-to-peak Increases in All Postwar Expansions Note: Units in billions of 2009 dollar, annualized quarterly 9 / 46
Fact 1: Skewnes As an Alternative Measure of Asymmetry Asymmetric Inventory Dynamics and Product Market Fact 1: Skewnes As an Alternative Measure of Asymmetry Skewness of Inventory Investment Relative to GDP 2017-11-29 150 Search 100 Density Skewness = -0.33 50 Fact 1: Skewnes As an Alternative Measure of Skewness of Inventory Investment Relative to GDP 0 Asymmetry −.02 −.01 0 .01 .02 Inventory−Investment Relative to GDP 150 Figure: Histogram of Inventory-investment-to-GDP Ratio 100 Density Skewness = -0.33 50 0 −.02 −.01 0 .01 .02 Inventory−Investment Relative to GDP Figure: Histogram of Inventory-investment-to-GDP Ratio 10 / 46
Fact 2: Inventory-sales ratio lags GDP Asymmetric Inventory Dynamics and Product Market Fact 2: Inventory-sales ratio lags GDP 2017-11-29 Search Inventory-sales ratios lags GDP by four quarters Positive cross-correlation is the largest at fourth lag Fact 2: Inventory-sales ratio lags GDP The lagging relationship is stable for the entire post-war period Inventory-sales ratios lags GDP by four quarters Positive cross-correlation is the largest at fourth lag The lagging relationship is stable for the entire post-war period 11 / 46
Fact 2: Inventory-sales Ratio Lags GDP by Four Lags Asymmetric Inventory Dynamics and Product Market Fact 2: Inventory-sales Ratio Lags GDP by Four Lags .1 2017-11-29 Search .05 0 −.05 Fact 2: Inventory-sales Ratio Lags GDP by .1 −.1 1947q3 1964q3 1981q3 1998q3 2015q3 Four Lags date Cyclical GDP, L4 Cyclical IS ratio Figure: HP Filtered (1600) .05 0 −.05 −.1 1947q3 1964q3 1981q3 1998q3 2015q3 date Cyclical GDP, L4 Cyclical IS ratio Figure: HP Filtered (1600) 12 / 46
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