TITLE:
Inventories, Interest Rates, and Markups
AUTHORS:
David G. Bivin
KEYWORDS:
Inventories, Interest Rates
JOURNAL NAME:
Theoretical Economics Letters,
Vol.1 No.2,
August
16,
2011
ABSTRACT: 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.