Why does inventory investment fluctuate so much?

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.