Inventory investment and production in Europe: Is there a pattern?

Abstract

The paper investigates the nexus between inventory investment and the change in aggregate production for 29 European countries over the period 2000-2009. A special interest is taken in the “Great Recession” of 2008/09. For most countries, a fairly uniform pattern emerges. Inventory investment is positively correlated with changes in production and follows the latter with a time-lag of two to three quarters. Therefore, there is no evidence that inventory investment either drives or smoothes the business cycle. Very few countries – Austria, Greece, Spain, and Switzerland – diverge from the typical pattern. This might hint to problems with respect to data quality.Inventory investment, production, business cycle, “Great Recession” in Europe