Economic Quarterly

The empirical study undertaken here employs a structural VAR to estimate the dynamic adjustment of manufacturing sales and inventories to both nominal demand and real supply shocks. The analysis suggests that these impulse responses are generally consistent with those of an equilibrium model of inventory behavior with sticky prices. However, fluctuations in sales and the inventory:sales ratio are found to be mainly driven by real disturbances at both short and long horizons. Moreover, at the business cycle frequency, the relatively minor role of monetary shocks in generating real fluctuations tends to hold consistently throughout the sample period considered.