The Evolution of Inventory Dynamics in a Post-Crisis Economy

Inventories are of historical importance to describing business cycles and production volatility. While research in inventories is relatively mature, the growing attention to global value chains and commodity shortages in recent quarters warrants a return and critical reassessment of inventories as a business cycle feature. Herein, we estimate the persistence, volatility, and adjustment rates of inventories over different periods, paying particular attention to the period following the Financial Crisis. We find through the estimation of a flexible accelerator model that inventories continue to exhibit strong persistence while the persistence of sales has simultaneously diminished. Using standard volatility metrics within the literature, we illustrate that production volatility relative to sales volatility is highest from 2007 onward. Finally, we uncover evidence from several vector error correction models that the adjustment speed and cointegrating relationship between inventory and sales has deteriorated in the years following the Financial Crisis. This evidence suggests the need for a structural model that can identify the mechanisms underlying these critical changes in inventory dynamics during the post-crisis era