Inventory investment and asymmetric adjustment: Some evidence for the UK

There is now a plethora of non-linear time-series models of output over the business cycle, and considerable empirical evidence that there are key non -linear, poorly understood mechanisms at work. Though they account for a sm all part of the total flow of national income, inventories play a dispropor tionately large role in fluctuations in output. It would seem natural to tr y to determine what role inventories play in the non-linear behaviour of th e business cycle. The first question is, are there economic models of firm behaviour suggesting that the movement of inventories over the business cyc le is non-linear? The second issue is whether we can detect such non-linear ity in the data. In this paper we use data on the aggregate behaviour of UK manufacturing, but disaggregated according to the stage of fabrication. We find that the asymmetric adjustment of inventories varies with the stage o f fabrication. (C) 2001 Elsevier Science B.V. All rights reserved.