What Do Inventories Tell Us About News-Driven Business Cycles?

There is widespread disagreement on the quantitative contribution of news shocks to business- cycle fluctuations. This paper provides a simple identifying restriction, based on inventory dynamics, that tightly pins down the contribution of news shocks to business-cycle volatility. We show that finished-good inventories must fall when there is an increase in consumption and investment induced by news shocks. A structural VAR with these sign restrictions indicates that news shocks account for at most 20 percent of output volatility. Since inventories comove positively with consumption and investment in the data, shocks that generate negative comovement cannot account for the bulk of fluctuations