(S, s) inventory policies in general equilibrium

We study the aggregate implications of (S, s) inventory policies in a dynam ic general equilibrium model with aggregate uncertainty. Firms in the model 's retail sector face idiosyncratic demand risk, and (S, s) inventory polic ies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation in the decis ion to order and variation in the rate of sale through the pricing decision s of retailers. We find that both mechanisms must operate to reconcile obse rvations that orders are more volatile than, and inventory investment is po sitively correlated with, sales, while remaining consistent with other sali ent business cycle characteristics. The model exhibits strong amplification for some shocks and persistence to a limited extent.