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Structural vector autoregression analysis reveals inventory accumulation rises with news of future productivity growth, indicating that rates of return drive inventory adjustments.
We study the determinants of inventory accumulation in a structural vector autoregression (VAR) framework with news shocks. Specifically, we investigate how news shocks affect two key determinants of inventory movements, namely, rates of return and marginal costs. We establish that inventories react strongly and positively to news about future increases in total factor productivity. We provide evidence that changes in external and internal rates of return are central to the transmission for such news shocks. We do not find evidence for a dominant role of marginal costs.
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Görtz et al. (2024) studied this question.
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