Taking Stock: A Critical Assessment of Recent Research on Inventories

TLDR

Inventory behavior attracted attention in the 1950s–60s, yet a growing tension between macroeconomists who viewed inventories as destabilizing and microeconomists who saw them as stabilizing went largely unexamined until the early 1980s, when their first‑order importance in business cycles was reaffirmed and the standard production‑smoothing model was found wanting. The paper examines subsequent developments following the recognition of inventories’ critical role and the shortcomings of the traditional model.

Abstract

Empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s. No one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories. Macroeconomists routinely thought of inventories as a destabilizing factor, yet the prevailing micro theory viewed inventories as a stabilizing factor. It was a fascinating question that was barely explored. Instead somewhat inexplicably, interest in inventories dried up, as if inventories were of minor economic significance and little intrinsic interest. By the early 1980s, then, economists once again knew something they had known in the 1950s: that inventory investment is of first-order importance in business cycles. But they were also beginning to realize that the standard production-smoothing/buffer-stock model of inventories was in deep trouble. This paper focuses on developments since that realization.