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Inventory investment is an important component of the Canadian business cycle. Despite its small average size - less than 1 per cent of output - it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance. Procyclicality of inventories is somewhat smaller than that of sales, resulting in a counter-cyclical aggregate inventory-sales ratio. These salient inventory facts are matched in a partial-equilibrium version of Kryvtsov and Midrigan's (2010) model in which firms hold stocks of goods to buffer against stock-outs.
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