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What is the role of inventories in UK manufacturing? The authors 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. They estimate structural parameters which allows them to make inferences on the role of inventories in cyclical frequencies. The results suggest that both types of inventories are used for production level (from demand shocks) and production cost (from cost shocks) smoothing. They 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.
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