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A Variance Bounds Test of the Linear Quadratic Inventory Model

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  • West, Kenneth D

Abstract

This paper develops and applies a novel test of the Holt, et al.(1961) linear quadratic inventory model. It is shown that a central property of the model is that a certain weighted sum of variances and covariances of production, sales and inventories must be nonnegative. The weights are the basic structural parameters of the model. The model may be tested by seeing whether this sum in fact is nonnegative. When the test is applied to some non-durables data aggregated to the two-digit SIC code level, it almost always rejects the model, even though the model does well by traditional criteria.
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Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jpolec:v:94:y:1986:i:2:p:374-401
    DOI: 10.1086/261378
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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. 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.
    3. Blinder, Alan S, 1981. "Inventories and the Structure of Macro Models," American Economic Review, American Economic Association, vol. 71(2), pages 11-16, May.
    4. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
    5. Alan J. Auerbach & Jerry R. Green, 1980. "Components of Manufacturing Inventories," NBER Working Papers 0491, National Bureau of Economic Research, Inc.
    6. 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.
    7. West, Kenneth D., 1983. "A note on the econometric use of constant dollar inventory series," Economics Letters, Elsevier, vol. 13(4), pages 337-341.
    8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
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