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Inventory Investment and the Real Interest Rate

Inventory Investment and the Real Interest Rate
Author: Sadaquat Junayed
Publisher:
Total Pages:
Release: 2009
Genre:
ISBN:
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The relationship between inventory investment and the real interest rate has been difficult to assess empirically. Recent work has proposed a linear-quadratic inventory model with time-varying discount factor to identify the effects of the real interest rate on inventory investment. The authors show that this framework does not separately identify the effects of real interest rate on inventory investment from variables that determine the expected marginal cost of production. In other words, the model does not deliver a testable restriction on the impact of interest rates on inventory investment. The authors highlight the consequences for both short- and long-run empirical analyses. They conclude that understanding the relationship between inventory investment and the real interest rate continues to be a theoretical and empirical challenge for macroeconomists. -- Inventory investment ; real interest rate

The Interest Rate, Learning, and Inventory Investment

The Interest Rate, Learning, and Inventory Investment
Author: Louis J. Maccini
Publisher:
Total Pages: 58
Release: 2003
Genre:
ISBN:
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We derive parametric tests for the role of the interest rate in specifications based on the firm's optimization problem. These Euler equation and decision rule tests mirror earlier evidence, finding little role for the interest rate. We present a simple and intuitively appealing explanation, based on regime switching in the real interest rate and learning, of why tests based on the stock adjustment model, the Euler equation, and decision rule - all of which emphasize short-run fluctuations in inventories and the interest rate - are unlikely to uncover a relationship. Our analysis suggests that inventories will not respond much to short-run fluctuations in the interest rate, but they should respond to long-run movements. Both simple and sophisticated tests confirm our predictions and show a highly significant long-run relationship between inventories and the interest rate. A formal model of our explanation yields a previously untested implication that is supported by the data. Keywords: Inventories, Interest Rates, Learning. JEL Classifications: E22.

Inventory Investment and the Cost of Capital

Inventory Investment and the Cost of Capital
Author: Christopher S. Jones
Publisher:
Total Pages: 50
Release: 2012
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ISBN:
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We examine the relation between inventory investment and the cost of capital in the time series and the cross section. We find consistent evidence that risk premia, rather than real interest rates, are strongly negatively related to future inventory growth at the aggregate, industry, and firm levels. The effect is stronger for firms in industries that produce durables rather than nondurables, exhibit greater cyclicality in sales, require longer lead times, and are subject to more technological innovation. We then construct a production-based asset pricing model with two types of capital, fixed capital and inventories, to explain these empirical findings. Convex adjustment costs and a countercyclical price of risk lead to negative time series and cross sectional relations between expected returns and inventory growth.