What Drives Inventory Accumulation? News on Rates of Return and Marginal Costs

We study the determinants of inventory accumulation in a structural VAR framework with
news shocks. Specifically, we investigate how news shocks affect two key determinants of
inventory movements, namely rates of return and marginal costs. We establish that
inventories react strongly and positively to news about future increases in total factor
productivity. 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 for a dominant
role of marginal costs.