This note explains why inventories might rise with interest rates. Higher real interest rates not only increase the carrying cost of inventories they also reduce the present value of the markup on delayed sales. When the markup is large enough, it is profitable to increase stocks in order to avoid sales delays. Another possibility is that the firm has an incentive to smooth its total stocks so that an increase in the real interest rate causes finished goods to fall but the reduction is partially offset by an increase in raw materials.
nullD. Bivin, "Inventories, Interest Rates, and Markups," Theoretical Economics Letters, Vol. 1 No. 2, 2011, pp. 41-45. doi: 10.4236/tel.2011.12010.
[1] A. S. Blinder and L. J. Maccini, “Taking Stock: A Critical Assessment of Recent Research on Inventories,” Journal of Economic Perspectives, Vol. 5, No. 1, 1991, pp. 73-96.
[2] L. J. Maccini, B. J. Moore and H. Schaller, “The Interest Rate, Learning, and Inventory Investment,” American Economic Review, Vol. 94, No. 5, 2004, pp. 1303-1327. doi:10.1257/0002828043052295
[3] V. A. Ramey and K. D. West, “Inventories,” In: J. B. Taylor and M. Woodford, Handbook of Macroeconomics, Vol. 1B, Elsevier, New York City, 1999, pp. 863-923.
[4] D. G. Bivin, “Inventories and Interest Rates: A Stage of Fabrication Approach,” The Berkeley Electronic Journal of Macroeconomics, Vol. 10, No. 1, 2010.
[5] J. A. Kahn, “Inventories and the Volatility of Production,” American Economic Review, Vol. 77, No. 4, 1987, pp. 667-679.
[6] J. A. Kahn, “Durable Goods Inventories and the Great Moderation,” Federal Reserve Bank of New York Staff Report, New York, No. 325, May 2008.
[7] D. G. Bivin, “Production Chains and Output Volatility,” Unpublished, Department of Economics, Indiana University Purdue University Indianapolis.
[8] S. D. Krane, “The Distinction Between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effects of Aggregation of Production Smoothing,” International Economic Review, Vol. 35, No. 1, 1994, pp. 117-136. doi:10. 2307/2527093
[9] B. R. Humphreys, L. J. Maccini and S. Schuh, “Input and Output Inventories,” Journal of Monetary Economics, Vol. 47, No. 2, 2001, 347-375. doi:10.1016/S0304-3932(01)00046-0