Can the Production Smoothing Model of Inventory Behavior be Saved?
The production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that seem very strong. Yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework, but actually to argue that the basic idea of production smoothing is all wrong. Most prominent among these is the fact that the variance of detrended production exceeds the variance of detrended sales. This paper first documents the stylized facts. Then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts. Finally, it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions.
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Volume (Year): 101 (1986)
Issue (Month): 3 ()
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- West, Kenneth D, 1986.
"A Variance Bounds Test of the Linear Quadratic Inventory Model,"
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- Lieberman, Charles, 1980. "Inventory Demand and Cost of Capital Effects," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 348-356, August.
- 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.
- Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
- F. Owen Irvine, 1981. "Specification errors and the stock-adjustment model: why estimated speeds-of-adjustment are too slow in inventory equations," Working Paper Series / Economic Activity Section 14, Board of Governors of the Federal Reserve System (U.S.).
- Irvine, F Owen, Jr, 1981. "Retail Inventory Investment and the Cost of Capital," American Economic Review, American Economic Association, vol. 71(4), pages 633-648, September. Full references (including those not matched with items on IDEAS)
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