This paper argues that the role of inventories in buffering unexpected shocks to fundamentals can account for the substantial volatility observed in inventory investment. The argument is illustrated using a particular real business cycle model. An independent contribution of the paper is that it is a case study in the application of the Hansen-Sargent methodology for estimating the parameters of a linear quadratic optimization problem in a non-linear quadratic environment.
ASJC Scopus subject areas
- Economics and Econometrics