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Production Smoothing in the Linear Quadratic Inventory Model

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  • Naish, Howard F

Abstract

Contrary to popular belief, the linear quadratic inventory model does not imply that, in response to demand shocks, output is always less variable than sales. When demand shocks are not anticipated, and without this assumption it is hard to see why firms should hold inventories in the first place, it is shown that output can be more variable than sales, even when the only shocks are demand shocks, and the inventory target is not a rising function of sales. The variance of output will typically exceed that of sales when the firm's marginal cost curve is fairly flat. Copyright 1994 by Royal Economic Society.

Suggested Citation

  • Naish, Howard F, 1994. "Production Smoothing in the Linear Quadratic Inventory Model," Economic Journal, Royal Economic Society, vol. 104(425), pages 864-875, July.
  • Handle: RePEc:ecj:econjl:v:104:y:1994:i:425:p:864-75
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    Cited by:

    1. Sheu, Jiuh-Biing, 2005. "A multi-layer demand-responsive logistics control methodology for alleviating the bullwhip effect of supply chains," European Journal of Operational Research, Elsevier, vol. 161(3), pages 797-811, March.
    2. Marcel Fafchamps Jan Willem Gunning & Remco Oostendorp, "undated". "Inventories, Liquidity, and Contractual Risk in African Manufacturing," Working Papers 97020, Stanford University, Department of Economics.
    3. Ginama, Isamu, 1996. "Conditional volatility and the production smoothing hypothesis of inventory investment," International Journal of Production Economics, Elsevier, vol. 45(1-3), pages 29-36, August.
    4. Ouyang, Yanfeng & Daganzo, Carlos, 2008. "Robust tests for the bullwhip effect in supply chains with stochastic dynamics," European Journal of Operational Research, Elsevier, vol. 185(1), pages 340-353, February.
    5. Naish, Howard F., 1998. "The linear quadratic inventory model as a micro foundation for Keynesian theories of the business cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 39-57, July.
    6. Fafchamps, Marcel & Gunning, Jan Willem & Oostendorp, Remco, 2000. "Inventories and Risk in African Manufacturing," Economic Journal, Royal Economic Society, vol. 110(466), pages 861-93, October.

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