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A Forecasting Model for Inventory Investments in Canada

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Listed author(s):
  • Marwan Chacra
  • Maral Kichian
Registered author(s):

    Abstract

    The authors present an empirical model to forecast short-run inventory investment behaviour for Canada. As with other recent studies that examine this series, they adopt an error-correction framework. Estimations using non-linear least squares and quarterly data yield both a good model fit and good out-of-sample forecasts. Given the debate in the United States on whether the adoption by firms of new information-technology-based methods of inventory management led to a decline in the volatility of U.S. output growth, the authors examine this issue for Canada. Results of the heteroscedasticity-robust Quandt likelihood ratio test advocated by Stock and Watson (2002) reveal very different dates for structural breaks in the volatilities of the growth contribution of inventory investment and of Canadian output growth: 1984Q1 and 1991Q2, respectively. Thus, the authors conclude that the "inventory hypothesis" is likely not an important explanation for the decline in the volatility of Canadian GDP growth.

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    Paper provided by Bank of Canada in its series Staff Working Papers with number 04-39.

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    Length: 28 pages
    Date of creation: 2004
    Handle: RePEc:bca:bocawp:04-39
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    Web page: http://www.bank-banque-canada.ca/

    Keywords: Domestic demand and components; Econometric and statistical methods;

    Find related papers by JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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    1. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
    2. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    3. Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
    4. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    5. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    6. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    7. Kim, Chang-Jin & Nelson, Charles R & Piger, Jeremy, 2004. "The Less-Volatile U.S. Economy: A Bayesian Investigation of Timing, Breadth, and Potential Explanations," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 80-93, January.
    8. Jean-Marie Dufour, 1997. "Some Impossibility Theorems in Econometrics with Applications to Structural and Dynamic Models," Econometrica, Econometric Society, vol. 65(6), pages 1365-1388, November.
    9. JONATHAN McCARTHY & EGON ZAKRAJSEK, 2007. "Inventory Dynamics and Business Cycles: What Has Changed?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 591-613, 03.
    10. Claus, I., 1997. "Modelling the behaviour of U.S. Inventories: A Cointegration-Euler Approach," Staff Working Papers 97-19, Bank of Canada.
    11. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    12. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June.
    13. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
    14. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    15. Alexandre Debs, 2001. "Testing for a Structural Break in the Volatility of Real GDP Growth in Canada," Staff Working Papers 01-9, Bank of Canada.
    16. 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.
    17. Hung-Hay Lau, 1996. "The role of inventory management in Canadian economic fluctuations," Bank of Canada Review, Bank of Canada, vol. 1996(Spring), pages 31-44.
    18. Donald P. Morgan, 1991. "Will just-in-time inventory techniques dampen recessions?," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 21-33.
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