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Working Paper 2005-046A

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"The Multiplier: A General Equilibrium Analysis of Multi-Stage-Fabrication Economy with Inventories"
by Yi Wen

This paper provides a general equilibrium multi-stage production model to explain the co-existence and co-movement of output- and input-inventories. The model offers a neoclassical perspective on the propagation mechanism of demand uncertainty. It reveals that uncertainty in demand at downstream can be transmitted and amplified towards upstream by inventory investment at all stages of production via input-output linkages, leading to a chain-multiplier effect on aggregate output and employment. The model
is capable of explaining several long-standing puzzles of the business cycle associated with inventories.

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Category > Monetary Policy/Macroeconomics
Author > Yi Wen