A multi-sector inventory model

Abstract Two competing paradigms for firm-level inventory behavior are production smoothing and (S,s). Empirical evidence that aggregate production varies more than sales, and inventory investment is positively correlated with sales, appears to contradict the buffer-stock/production-smoothing motivation. Work by Blinder and Maccini suggests that an (S,s) model better explains these stylized facts. I simulate a multi-sector model with sequential interaction of heterogeneous agents (representing manufacturing, wholesale and retail agents) who use either smoothing or (S,s) inventory decision rules. The results demonstrate that the stylized facts can be explained by a model of this type.

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