Discussion Paper

The magnitude of the speculative motive for holding inventories in a real business cycle model

Abstract: The motive to hold inventories purely in the hope of profiting from a price increase is called the speculative motive. This motive has received considerable attention in the literature. However, existing studies do not have a clear implication for how large it is quantitatively. This paper incorporates the speculative motive for holding inventories into an otherwise standard real business cycle model and finds that empirically plausible parameterizations of the model result in an average inventory stock to output ratio that is virtually zero. For this reason, we conclude that the quantitative magnitude of the speculative role for holding inventories in this model is quite small. This suggests the possibility that the study of aggregate economic phenomena can safely abstract from inventory speculation.

Keywords: Business cycles; Inventories;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1989

Number: 10