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Production Smoothing in the Linear Quadratic Inventory Model

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  • Naish, Howard F
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    Abstract

    Contrary to popular belief, the linear quadratic inventory model does not imply that, in response to demand shocks, output is always less variable than sales. When demand shocks are not anticipated, and without this assumption it is hard to see why firms should hold inventories in the first place, it is shown that output can be more variable than sales, even when the only shocks are demand shocks, and the inventory target is not a rising function of sales. The variance of output will typically exceed that of sales when the firm's marginal cost curve is fairly flat. Copyright 1994 by Royal Economic Society.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 104 (1994)
    Issue (Month): 425 (July)
    Pages: 864-75

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    Handle: RePEc:ecj:econjl:v:104:y:1994:i:425:p:864-75

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    Cited by:
    1. Naish, Howard F., 1998. "The linear quadratic inventory model as a micro foundation for Keynesian theories of the business cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 39-57, July.
    2. Ginama, Isamu, 1996. "Conditional volatility and the production smoothing hypothesis of inventory investment," International Journal of Production Economics, Elsevier, vol. 45(1-3), pages 29-36, August.
    3. Miragliotta, Giovanni, 2006. "Layers and mechanisms: A new taxonomy for the Bullwhip Effect," International Journal of Production Economics, Elsevier, vol. 104(2), pages 365-381, December.
    4. Wright, David & Yuan, Xin, 2008. "Mitigating the bullwhip effect by ordering policies and forecasting methods," International Journal of Production Economics, Elsevier, vol. 113(2), pages 587-597, June.
    5. Ouyang, Yanfeng & Daganzo, Carlos, 2005. "Counteracting the Bullwhip Effect with Decentralized Negotiations and Advance Demand Information," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt0489z4qg, Institute of Transportation Studies, UC Berkeley.
    6. Marcel Fafchamps & Jan Willem Gunning and Remco Oostendorp, 1999. "Inventories and risk in African manufacturing," Economics Series Working Papers WPS/1999-19, University of Oxford, Department of Economics.
    7. Ouyang, Yanfeng & Daganzo, Carlos F., 2005. "Some Properties of Decentralized Supply Chains," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt5qt7g4tv, Institute of Transportation Studies, UC Berkeley.
    8. Holly, Sean & Turner, Paul, 2001. "Inventory investment and asymmetric adjustment: Some evidence for the UK," International Journal of Production Economics, Elsevier, vol. 72(3), pages 251-260, August.
    9. Sheu, Jiuh-Biing, 2005. "A multi-layer demand-responsive logistics control methodology for alleviating the bullwhip effect of supply chains," European Journal of Operational Research, Elsevier, vol. 161(3), pages 797-811, March.
    10. Marcel Fafchamps Jan Willem Gunning & Remco Oostendorp, . "Inventories, Liquidity, and Contractual Risk in African Manufacturing," Working Papers 97020, Stanford University, Department of Economics.

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