Production and Inventory Behavior of Capital

Yi Wen

This paper provides a dynamic optimization model of durable goods inventories to study the interactions between investment demand and the production of capital goods. There are three major findings: first, capital suppliers’ inventory behavior makes investment demand more volatile in equilibrium; second, equilibrium price of capital is characterized by downward stickiness; and third, the responses of the capital market to interest rate and other environmental changes are asymmetric. All are the result of equilibrium interactions between demand and supply.