Production, sales, and the change in inventories : An identity that doesn't add up
In this paper we examine two different measures of monthly production that have been used by economists. The first measure, which we refer to as IP, is the index of industrial production constructed by the Board of Governors of the Federal Reserve. This measure is used extensively in empirical work on the business cycle, as well as by policymakers and others to assess the current state of the economy. The second measure, which we refer to as Y4, is constructed from the accounting identity that output equals sales plus the change in inventories. Sales and inventory data are reported by the Department of Commerce. This measure of output is frequently used to estimate models of inventory accumulation. Theoretically, these two series measure the same underlying economic variable -- the production of goods by firms during the month. We show here that the time series properties of these two series are radically different. We examine means, variances, and serial correlation coefficients of the log growth rates, and show that these statistics differ substantially between the two series. In addition, the cross-correlations between the two seasonally adjusted series range from .7 to .0 and are in most cases less than .4. We then demonstrate the significance of these differences in two ways. First, we estimate a model of white noise measurement error for the two series. The estimates indicate that in 15 out of 20 2-digit industries measurement error accounts for over 40% of the variation in the monthly growth rates of seasonally adjusted industrial production data. Second, we show that the variance bounds results of Blinder’s (1986) study of inventory behavior are partially reversed when the IF rather than the Y4 output measure is used.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth D. West, 1985.
"A Variance Bounds Test of the Linear Quardractic Inventory Model,"
NBER Working Papers
1581, National Bureau of Economic Research, Inc.
- West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April.
- Alan S. Blinder, 1984.
"Can The Production Smoothing Model of Inventory Behavior be Saved?,"
NBER Working Papers
1257, National Bureau of Economic Research, Inc.
- Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 431-453.
- Lichtenberg, Frank R & Griliches, Zvi, 1989.
"Errors of Measurement in Output Deflators,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 7(1), pages 1-9, January.
- Alan C. Stockman, 1987.
"Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries,"
NBER Working Papers
2313, National Bureau of Economic Research, Inc.
- Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
- N. Gregory Mankiw & Matthew D. Shapiro, 1986. "News or Noise? An Analysis of GNP Revisions," NBER Working Papers 1939, National Bureau of Economic Research, Inc.
- Campbell, John Y. & Mankiw, N. Gregory, 1989.
"International evidence on the persistence of economic fluctuations,"
Journal of Monetary Economics,
Elsevier, vol. 23(2), pages 319-333, March.
- Mankiw, N. Gregory & Campbell, John, 1989. "International Evidence on the Persistence of Economic Fluctuations," Scholarly Articles 3224417, Harvard University Department of Economics.
- John Y. Campbell & N. Gregory Mankiw, 1988. "International Evidence on the Persistence of Economic Fluctuations," NBER Working Papers 2498, National Bureau of Economic Research, Inc.
- Jeffrey A. Miron & Stephen P. Zeldes, .
"Seasonality, Cost Shocks and the Production Smoothing Model of Inventories,"
Rodney L. White Center for Financial Research Working Papers
01-87, Wharton School Rodney L. White Center for Financial Research.
- Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
- Jeffrey A. Miron & Stephen P. Zeldes, . "Seasonality, Cost Shocks and the Production Smoothing Model of Inventories," Rodney L. White Center for Financial Research Working Papers 1-87, Wharton School Rodney L. White Center for Financial Research.
- Jeffrey A. Miron & Stephen P. Zeldes, 1987. "Seasonality, Cost Shocks, and the Production Smoothing Model of Inventories," NBER Working Papers 2360, National Bureau of Economic Research, Inc.
- Newey, Whitney K & West, Kenneth D, 1987.
"A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,"
Econometric Society, vol. 55(3), pages 703-708, May.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- West, Kenneth D., 1983. "A note on the econometric use of constant dollar inventory series," Economics Letters, Elsevier, vol. 13(4), pages 337-341.
- Reagan, Patricia & Sheehan, Dennis P., 1985. "The stylized facts about the behavior of manufacturers' inventories and backorders over the business cycle: 1959-1980," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 217-246, March.
- Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
- Eichenbaum, Martin S., 1984. "Rational expectations and the smoothing properties of inventories of finished goods," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 71-96, July.
- Christopher A. Sims, 1974. "Output and Labor Input in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(3), pages 695-736.
- Maccini, Louis J & Rossana, Robert J, 1984. "Joint Production, Quasi-Fixed Factors of Production, and Investement in Finished Goods Inventories," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 218-36, May.
When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:24:y:1989:i:1:p:31-51. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.