Input and Output Inventories in the UK

Tsoukalas, John (2009): Input and Output Inventories in the UK. Forthcoming in: Economica

Abstract

What is the role of inventories in UK manufacturing? We present and estimate a model of inventories that considers separately finished goods and input (i.e. the sum of raw materials and work-in-process) inventories. We estimate structural parameters which allows us to make inferences on the role of inventories in cyclical frequencies. Our results suggest that both types of inventories are used for production level (from demand shocks) and production cost (from cost shocks) smoothing. We identify a small but significant negative relationship between inventories and the real interest rate thus providing support for one of the textbook channels of the monetary policy transmission mechanism. Variance decompositions indicate that technology shocks are the dominant driving factor behind cyclical changes in inventories. These shocks account for over 35% of the forecast error variance at these frequencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inventories; Linear-quadratic model; Interest rates
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General

References

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Benito, A.: 2005, Financial pressure, monetary policy effects and inventories: Firm-level evidence from a market based and a bank-based ¯nancial system, Economica 72.