The Behavior of Inventories over the Business Cycle: Evidence across Levels of Development

This paper documents how inventory dynamics vary across levels of development and how they respond to real and financial shocks. Using a balanced panel of 72 small open economies over 1993-2022, spanning advanced to low-income economies, we show that inventories are strongly procyclical in advanced economies but become acyclical at lower income levels, while volatility and persistence rise as development declines. Using local projections, we estimate inventory responses to a long-run productivity shock and to a financial shock identified from the spread between U.S. corporate bond yields and Treasury yields. Productivity shocks generate temporary inventory accumulation across all groups, with smoother adjustment in advanced economies and more irregular cycles in emerging and developing economies. Financial shocks trigger decumulation followed by a rebound in higher-income groups, but a delayed, unreversed decline in low-income economies.