 |
Inventories are an important, highly volatile and forward looking component of the business cycle, yet they have been largely neglected by the literature on TFP news shocks that argues such shocks are important drivers of macroeconomic fluctuations. We use a standard VAR identification to document a new fact: in response to TFP news, inventories move procyclically along with the other major macroeconomic aggregates. Our finding is not self-evident: conventional views would suggest news about higher future productivity provides incentives to run the current inventory stock down and increase stockholding in the future when productivity is high. We provide evidence that this substitution effect is dominated by a demand effect due to which firms increase inventories in response to sales in light of rising consumption and investment. Our empirical fact corroborates the view that TFP news shocks are important drivers of macroeconomic fluctuations. However, it imposes a challenge to existing theoretical frameworks as they fail to reproduce the procyclical inventory movements in response to TFP news shocks. We suggest this comovement puzzle can be solved through extending a standard framework with intangible capital.
