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Economic Quarterly

Spring 1998

Inventory Investment and the Business Cycle

Andreas Hornstein

Inventory investment, one of the more volatile components of gross domestic product, is often considered to be a major contributor to aggregate fluctuation. A review of previous work by Blinder and Maccini (1991) on the stylized facts of inventory investment confirms that, over the business cycle, production is more volatile than sales, and inventory investment increases with sales. Contrary to conventional wisdom, however, it does not appear that inventory investment contributes substantially to fluctuations of output over the business cycle. For shorter-term fluctuations, however, inventory investment accounts for a substantial part of output volatility.

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