Discussion Paper 10

The Magnitude of the Speculative Motive for Holding Inventories in a Real Business Cycle Model

Lawrence J. Christiano | Consultant
Terry J. Fitzgerald | Senior Economist and Vice President

Published January 1, 1989

Abstract
The motive to hold inventories purely in the hope of profiting from a price increase is called the speculative motive. This motive has received considerable attention in the literature. However, existing studies do not have a clear implication for how large it is quantitatively. This paper incorporates the speculative motive for holding inventories into an otherwise standard real business cycle model and finds that empirically plausible parameterizations of the model result in an average inventory stock to output ratio that is virtually zero. For this reason, we conclude that the quantitative magnitude of the speculative role for holding inventories in this model is quite small. This suggests the possibility that the study of aggregate economic phenomena can safely abstract from inventory speculation.


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