Beginning in the mid-1980s, the nature of U.S. business cycles changed in important ways, as made evident by distinctive shifts in the comovement and relative volatilities of labor productivity, hours, output, and inventories. Unlike the widely documented change in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact that inventory data are informative about sources of business cycles. Specifically, they provide additional information relative to aggregate investment regarding firms' intertemporal decisions. In this paper, we show that variations in the discount factor estimated using inventories correlate well with established independent measures of credit market frictions. Furthermore, these variations, which in our model may be interpreted as fluctuations in a generalized investment wedge, play a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s.
Our Research Focus: Economic Growth and Business Cycles