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Abstract

Understanding inventory movements is central to an understanding of business cycles. This paper presents an empirical study of the behavior of inventories in the automobile industry. It finds that inventory behavior is well explained by the assumption of intertemporal optimization with rational expectations. The underlying cost structure appears to have substantial costs of changing production as well as substantial costs of being away from target inventory, the latter being a function of current sales. Given this cost structure, whether inventory behavior is stabilizing or destabilizing depends on the characteristics of the demand process. In the automobile industry, inventory behavior is destabilizing: the variance of production is larger than the variance of sales.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0891.

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Date of creation: Sep 1983
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Handle: RePEc:nbr:nberwo:0891

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1. Thomas J. Sargent, 1977. "Rational expectations, econometric exogeneity and consumption," Staff Report 25, Federal Reserve Bank of Minneapolis.
   
   • Sargent, Thomas J, 1978. "Rational Expectations, Econometric Exogeneity, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 673-700, August.
2. Michael C. Lovell, 1959. "Manufacturers' Inventories, Sales Expectations, and the Acceleration Principle," Cowles Foundation Discussion Papers 86, Cowles Foundation for Research in Economics, Yale University.
3. Martin Feldstein & Alan Auerbach, 1976. "Inventory Behavior in Durable-Goods Manufacturing: The Target-Adjustment Model," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 351-408.
4. Olivier J. Blanchard & Angelo Melino, 1986. "Cyclical Behavior of Prices and Quantities in the Automobile Market," NBER Working Papers 1325, National Bureau of Economic Research, Inc.
5. Olivier J. Blanchard, 1982. "Identification in Dynamic Linear Models with Rational Expectations," NBER Technical Working Papers 0024, National Bureau of Economic Research, Inc.
6. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
   
   • Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
7. Alan S. Blinder, 1983. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
   
   • Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June.
8. Irvine, F Owen, Jr, 1981. "A Study of Automobile Inventory Investment," Economic Inquiry, Western Economic Association International, vol. 19(3), pages 353-79, July.

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