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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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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
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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  3. Engsted, Tom & Haldrup, Niels, 1999. " Multicointegration in Stock-Flow Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 237-54, May. [Downloadable!] (restricted)
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  4. Rossana, Robert J, 1998. "Structural Instability and the Production-Smoothing Model of Inventories," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 206-15, April.
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  6. Engsted, Tom & Haldrup, Niels, 1999. "Estimating the LQAC Model with I(2) Variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 155-70, March-Apr. [Downloadable!]
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  7. Sensier, M., 1997. "Inventories and Asymmetric Business Cycle Fluctuations in the UK," Economics Series Working Papers 99192, University of Oxford, Department of Economics.
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  9. Rossana, Robert J, 1995. "Technology Shocks and Cointegration in Quadratic Models of the Firm," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 5-17, February. [Downloadable!] (restricted)
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  12. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  13. Blinder, Alan S & Maccini, Louis J, 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. [Downloadable!] (restricted)
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