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14:00 | Macro Research Seminar
London School of Economics and Political Science, United Kingdom
Abstract: The change in the volume of inventories is a quantitatively important component of GDP fluctuations but is ignored in virtually all business cycle models. Building tractable business cycle models with inventories has been hampered by the difficulty of inventory models to replicate key facts regarding the observed behavior of inventories, the most challenging being that production is more volatile than sales. This paper shows that a business cycle model with a simple goods market friction can replicate inventory facts and incorporate a role for inventories in business cycle analysis.
