We study the effects of news shocks on inventory accumulation in a structural VAR
framework. We establish that inventories react strongly and positively to news about
future increases in total factor productivity. Theory suggests that the transmission
channel of news shocks to inventories works through movements in marginal costs,
through movements in sales, or through interest rates. We provide evidence that changes
in external and internal rates of return are central to the transmission for such news
shocks. We do not find evidence of a strong substitution effect that shifts production
from the present into the future