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Inventories and the Short-Run Dynamics of Commodity Prices

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  • Robert S. Pindyck

Abstract

Competitive producers hold inventories to reduce costs of adjusting production and to reduce marketing costs by facilitating scheduling and avoiding stockouts. Using data for copper, heating oil, and lumber, I estimate these costs within a structural model of production, sales, and storage, and I study their implications for inventory and price behavior. Unlike earlier studies, this work focuses on homogeneous and fungible commodities. This avoids aggregation problems, and it allows the use of direct measures of units produced, rather than inferences from dollar sales. Also, I estimate Euler equations and allow the marginal value of storage to be a convex function of the stock. This fits the data better, and helps explain the role of storage. Finally, I use futures prices to directly measure the marginal value of storage. I find a production-smoothing role for inventories only for heating oil, and during periods of low or normal prices. A more important role is to reduce marketing costs.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 25 (1994)
Issue (Month): 1 (Spring)
Pages: 141-159

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Handle: RePEc:rje:randje:v:25:y:1994:i:spring:p:141-159

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  1. Jeffrey A. Miron & Stephen P. Zeldes, 1989. "Seasonality, Cost Shocks, and the Production Smoothing Model of Inventories," NBER Working Papers 2360, National Bureau of Economic Research, Inc.
  2. Eichenbaum, Martin, 1983. "A rational expectations equilibrium model of inventories of finished goods and employment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(2), pages 259-277.
  3. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
  4. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
  5. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 334-48, June.
  6. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1075-93, December.
  7. Williams, Jeffrey, 1987. "Futures Markets: A Consequences of Risk Aversion or Transactions Costs?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1000-1023, October.
  8. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(4), pages 321-346, December.
  9. Ray C. Fair, 1989. "The Production Smoothing Model Is Alive and Well," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 896, Cowles Foundation for Research in Economics, Yale University.
  10. Olivier J. Blanchard & Angelo Melino, 1984. "Cyclical Behavior of Prices and Quantities in the Automobile Market," NBER Working Papers 1325, National Bureau of Economic Research, Inc.
  11. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(2), pages 374-401, April.
  12. Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, Elsevier, vol. 14(1), pages 71-96, July.
  13. French, Kenneth R., 1983. "A comparison of futures and forward prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 12(3), pages 311-342, November.
  14. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 338-54, June.
  15. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 853-64, September.
  16. Bresnahan, Timothy F & Suslow, Valerie Y, 1985. "Inventories as an Asset: The Volatility of Copper Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 409-24, June.
  17. Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  18. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 667-79, September.
  19. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 233.
  20. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 58(2), pages 135-57, April.
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