Input and output inventories in the UK

What is the role of inventories in UK manufacturing? We present and estimate a model of inventories that considers separately finished goods and input (i.e. the sum of raw materials and work-in-process) inventories. Our results suggest that both types of inventories are used for production level and production cost smoothing. We identify a small but significant negative relationship between inventories and the real interest rate, thus providing support for one of the textbook channels of the monetary policy transmission mechanism. Variance decompositions indicate that technology shocks are the dominant driving factor behind cyclical changes in inventories