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A Re-interpretation of the Linear-Quadratic Model When Inventories and Sales are Polynomially Cointegrated

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Author Info
Anindya BANERJEE
Paul MIZEN

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Abstract

Estimation of the linear quadratic model, the workhorse of the inventory literature, traditionally takes inventories and sales to be first-difference stationary series, and the ratio of the two to be stationary. However, these assumptions do not match the properties of the data for the last two decades in the US and the UK. We offer a model that allows for the non-stationary characteristics of the data, using polynomial cointegration. We show that the closed-form solution has other recent models as special cases. The resulting model performs well and shows good forecasting properties.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2003/11.

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Date of creation: 2003
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Handle: RePEc:eui:euiwps:eco2003/11

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Related research
Keywords: cointegration; linear quadratic; inventories;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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