Inventories, monetary factors, and propagation of cycles

A literature review of inventory research showed that there is a disagreement among economists about the relation between inventories and certain macroeconomic variables such as interest rate and prices. The differences in the results among the economists are mainly related to how to investigate this relation or which model to use to study this phenomenon. In addition, many economists agreed that understanding the inventories fluctuations is a necessary condition for understanding the business cycle, but there is no general agreement on how inventories propagate the business cycle. The goal of this dissertation is to focus on the macroeconomic level of inventories: specifically, to try to investigate empirically the relation between inventories and both interest rate and price and to study the role of inventories in the propagation of the business cycle.; To achieve the abovementioned objectives, this study employed the cointegration analysis to investigate short-run dynamic relationships among the variables. Moreover, this dissertation utilized both the IS-LM model and the aggregate demand-supply model to illustrate how inventories change in the economy as a result of the reaction to macroeconomic variables and how the change in inventories, as a feedback, affects those macroeconomic variables. This dissertation used both aggregated and disaggregated quarterly data from the U.S. economy from the period 1959--1997.; The findings of this dissertation showed that the role of inventories in the monetary transmission is weak on both the aggregate and disaggregate levels. This weak relation is explained in three ways. First, the relation between inventories and interest is determined through a transitive relation between interest rate and both real gross domestic product (RGDP) and real final sales (RFS). Second, other components of money such as inside money have a more significant impact on inventories than the outside money and interest rate. Third, some kinds of inventories such as manufacturing inventories have a positive relation with the interest rate.; The results showed that the relation between inventories and prices is negative but weak because it is indirect relation. The strength of this relation relies mainly on how each variable changes in the economy. And I believe to identify stronger relation between inventories and prices, we need to use higher frequency data or annual data.; This dissertation showed that the change of inventories depends mainly on the relation between RGDP and RFS. The empirical results showed that there is a positive relation between inventories and both RGDP and RFS over the business cycle. While, in the very short-run the direct relation between RFS and inventories is negative.; The role of increase in inventories in the propagation of business cycle in response to a policy action signals more confidence in the economy because of lower interest rate and lower prices accompanied by higher consumption and investment. Therefore, this dissertation showed that increase in inventories is not only able to decrease the aggregate supply because of decreasing the demand for labor, but also is able to increase the aggregate demand. This means there will continue to be changes in the prices and the interest rate which will make the fluctuation faster.