Inventories, Markups, and Real Rigidities in Menu Cost Models

Abstract

Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available. We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs.We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-tosales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio. JEL classification: E31, F12 Bank classification: Business fluctuations and cycles; Transmission of monetary policy RésuméLes rigidités réelles qui limitent la sensibilité du coût marginal réel aux fluctuations de la production sont un élément essentiel des modèles à prix rigides, nécessaire pour rendre compte de

Inventories, Liquidity, and the Macroeconomy

“…26 The functions fG( ); D( ); H( )g are the same as those de…ned in (21). The aggregate decision rules for 26 Note that (45) can also be written as = R( )G( ) the input inventory sector are similarly given by…”

“…In reality, one of the most important and obvious bene…ts for carrying inventories is liquidity. Output inventories are more liquid in facilitating sales than inputs, and input inventories are more liquid in 2 Recent exceptions include Fisher and Hornstein (2000), Thomas (2007a, 2007b), Kryvtsov and Midrigan (2008), and Wen (2005b). 3 Important empirical works based on partial-equilibrium analysis include Blanchard (1983), Blinder (1986), Coen-Pirani (2004), Eichenbaum (1989), Haltiwanger and Maccini (1988), Kahn (1992), Ramey (1991), Ramey and West (1999), Wen (2005a), and West (1986), among many others.…”

Inventories and real rigidities in New Keynesian business cycle models

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Abstract Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle.

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“…Bils and Kahn (2000) show that the behavior of inventories over the cycle is informative about the cyclicality of costs. In Kryvtsov and Midrigan (2008) we use Bils and Kahn's insights to gauge the implications of models of the second class of real rigidities for the behavior of inventories. If the marginal cost of acquiring and holding inventories is indeed lower in times of monetary expansions, we should see this lower cost reflected not only in a slow adjustment of prices to a monetary shock, but also in an increase in the firm's inventory holdings.…”

Customer Capital, Markup Cyclicality, and Amplification

“…Bils (1987), Rotemberg and Woodford (1999), and Nekarda and Ramey (2013) use labor input to test the markup cyclicality at the aggregate level. Other studies infer the cyclicality using inventories (Kryvtsov and Midrigan, 2012), retail prices (Stroebel and Vavra, 2014), and advertising expenses (Hall, 2014). I follow Bils, Klenow, and Malin (2018) to use material inputs, but I estimate the markup at the firm level using IO techniques by De Loecker and Warzynski (2012).…”