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The Long-Run Implications of the Production Smoothing Model of Inventories: An Empirical Test

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  • Rossana, R J

Abstract

This paper provides an empirical test of the long-run implications of the production smoothing model of inventories, the dominant framework for inventory investment research in the past. Intertemporal models of a firm holding inventories of finished goods predict a long-run relationship between inventories, shipments, factor input prices, and the real interest rate which is tested here using cointegration test procedures. These tests provide little support for the predictions of the production smoothing model. In most of the data sets used, test statistics indicate that inventories, shipments, factor input prices, the nominal interest rate, and the inflation rate maintain a long-run equilibrium relationship but parameter estimates of cointegrating vectors are often implausible, typically rejecting hypotheses implied by structural models of the production smoothing motive for holding inventories. Copyright 1993 by John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 8 (1993)
Issue (Month): 3 (July-Sept.)
Pages: 295-306

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Handle: RePEc:jae:japmet:v:8:y:1993:i:3:p:295-306

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Cited by:
  1. Bartholomew Moore & Louis J Maccini & Huntley Schaller, 2002. "The Interest Rate Learning and Inventory Investment," Economics Working Paper Archive 512, The Johns Hopkins University,Department of Economics, revised Apr 2004.
  2. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
  3. Louis J. Maccini & Bartholomew Moore & Huntley Schaller, 2013. "Inventory Behavior with Permanent Sales Shocks," Fordham Economics Discussion Paper Series dp2013-03, Fordham University, Department of Economics.

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