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A Forecasting Model for Inventory Investments in Canada

  • Marwan Chacra
  • Maral Kichian
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    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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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp04-39.pdf
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    Paper provided by Bank of Canada in its series Working Papers with number 04-39.

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    Length: 28 pages
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:bca:bocawp:04-39
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    1. Alexandre Debs, 2001. "Testing for a Structural Break in the Volatility of Real GDP Growth in Canada," Working Papers 01-9, Bank of Canada.
    2. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
    3. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    4. 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.
    5. Donald S. Allen, 1995. "Changes in inventory management and the business cycle," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 17-26.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
    11. 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.
    12. 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.
    13. Claus, I., 1997. "Modelling the behaviour of U.S. Inventories: A Cointegration-Euler Approach," Working Papers 97-19, Bank of Canada.
    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 518-29, October.
    15. 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.
    16. 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.
    17. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
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