Inventories and capacity utilization in general equilibrium

The primary goal of this dissertation is to gain a better understanding, in thecontext of a dynamic stochastic general equilibrium framework, of the role of inventories and capacity utilization (of both capital and labor) and, in particular, therelationship among them. These are variables which have long been recognized asplaying an important role in the business cycle. An analysis of the association between inventories and capital utilization seems natural, for physical capital could beseen as a stock ultimately destined to be transformed into an inventory of finishedgoods. In the same way, inventories could be seen as a stock of physical capital already transformed into finished goods. Introducing variable rates of utilization ofcapacity, then both can be seen as providing a short-run adjustment "buffer stock"mechanism.The analysis of the relationship between those variables is centered on the effectsof two possible shocks: preference (demand) shocks and technology shocks. Impulse-response experiments show that inventories and the rate of capital utilization aremostly complements, while inventories and the rate of labor utilization are mostlysubstitutes. Moreover, low-persistence shocks emphasize the role of inventories asbeing a "shock absorber", whereas high-persistence shocks emphasize the role of inventories as being a complement to consumption. Consistent with the stylized facts inthe literature, simulation results show that inventory holdings are pro-cyclical, while the inventory-to-sales ratio is counter-cyclical.Two additional "themes" are explored. The first has to do with the treatmentof uncertainty and the consequences of using, as it is done in most of the literature, afirst-order approximation. By approximating the decision rules to a second order, weobserve that higher exogenous uncertainty enhances the importance of the precautionary motive to holding inventories. The second additional theme is a more generalframework for the analysis of capital utilization. We find that the two most commonways of modeling capital utilization can t in a more general specification that incorporates spending on capital maintenance. Though the aforementioned results do notvary qualitatively after that concept is introduced, quantitative answers do.