Firm-level Inventory Dynamics in Korea: A Production-augmented (S, s) Inventory Model*

In this paper, we extend the conventional (S, s) model by incorporating a production process. This extension allows us to analyze not only retailers' but also manufacturers' inventories. Simulation exercises show that our model can generate stylized facts about inventory behaviors. We use the inventory model to estimate firm-level inventory dynamics in Korea. The estimation results suggest that the predictions implied by our inventory model are largely consistent with the data. The expected demand for finished goods turns out to be the most important factor contributing to inventory variations at the individual firm level. At the aggregate level, however, heterogeneity across firms also matters.