Advanced Search
MyIDEAS: Login to save this article or follow this journal

Risk-Smoothing Across Time and the Demand for Inventories: A Mean-Variance Approach

Contents:

Author Info

  • Richard D. Farmer

    ()
    (Congressional Budget Office)

Registered author(s):

    Abstract

    The standard production smoothing model of inventory demand cannot represent the added incentives for smoothing risks or explain the impact of market shocks that independently affect expectations and uncertainty. Those limitations are overcome by modeling inventory demand as a problem in deterministic optimal control, with the risk-averse firm maximizing utility that is a separable function of the mean and variance of returns and the firm controlling on two decision variables, production and inventory investment. Support for the mean-variance approach comes from regressions using Survey of Professional Forecasters data to show how changes in the mean forecasts of the GDP price deflator and changes in the disagreement among deflator forecasts can explain changes in aggregate inventory investment over time. Further support comes from the ability of the model to explain the excess volatility of industry output over sales—a fact at odds with the production smoothing theory.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume32/V32N4P699_722.pdf
    Download Restriction: no

    Bibliographic Info

    Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

    Volume (Year): 32 (2006)
    Issue (Month): 4 (Fall)
    Pages: 699-722

    as in new window
    Handle: RePEc:eej:eeconj:v:32:y:2006:i:4:p:699-722

    Contact details of provider:
    Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
    Phone: (201) 684-7346
    Email:
    Web page: http://www.ramapo.edu/eea/journal.html
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
    2. Sinn, Hans-Werner, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," Munich Reprints in Economics 19848, University of Munich, Department of Economics.
    3. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
    4. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    5. Albert L. Nichols & Richard J. Zeckhauser, 1977. "Stockpiling Strategies and Cartel Prices," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 66-96, Spring.
    6. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    7. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-87, September.
    8. Giordani, Paolo & Soderlind, Paul, 2000. "Inflation Forecast Uncertainty," Working Paper Series in Economics and Finance 384, Stockholm School of Economics, revised 09 Oct 2000.
    9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    10. repec:att:wimass:9326 is not listed on IDEAS
    11. Brad R. Humphreys & Louis J. Maccini & Scott Schuh, 1997. "Input and output inventories," Working Papers 97-7, Federal Reserve Bank of Boston.
    12. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
    13. Meyer, Jack & Rasche, Robert H, 1992. "Sufficient Conditions for Expected Utility to Imply Mean-Standard Deviation Rankings: Empirical Evidence Concerning the Location and Scale Condition," Economic Journal, Royal Economic Society, vol. 102(410), pages 91-106, January.
    14. Meyer, Jack, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Reply," American Economic Review, American Economic Association, vol. 79(3), pages 603, June.
    15. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    16. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September.
    17. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-81, March.
    18. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
    19. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    20. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
    21. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
    22. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA.
    23. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory Investment, Internal-Finance Fluctuation, and the Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 75-138.
    24. Feldstein, Martin S, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 5-12, January.
    25. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
    26. Steven N. Durlauf & Louis J. Maccini, 1993. "Measuring Noise in Inventory Models," NBER Working Papers 4487, National Bureau of Economic Research, Inc.
    27. Levy, Haim, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, vol. 79(3), pages 597-600, June.
    28. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
    29. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June.
    30. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    31. Richard Farmer, 1997. "Intertemporal effects of environmental mandates," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(3), pages 365-381, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eej:eeconj:v:32:y:2006:i:4:p:699-722. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.