Time-to-produce, inventory, and asset prices

Abstract

Time-to-build, time-to-produce, and inventory have important implications for asset prices and quantity dynamics in a general equilibrium model with recursive preferences. Time-to-build captures the delay in transforming new investments into productive capital, and time-to-produce captures the delay in transforming productive capital into output. Both delays increase risks in that time-to-build generates procyclical payouts, whereas the time-to-produce amplifies this procyclicality. Inventory smooths consumption and helps capture interest rate volatility even when the elasticity of intertemporal substitution is small. The model is consistent with a high equity premium, a high stock return volatility, and lead-lag relations between asset prices and macroeconomic quantities.