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Inventories and the short-run dynamics of commodity prices

  • Pindyck, Robert S.

Competitive producers hold inventories to reduce costs of adjusting production and to reduce marketing costs by facilitating scheduling and avoiding stockouts. Using data for copper, heating oil, and lumber, I estimate these costs within a structural model of production, sales, and storage, and I study their implications for inventory and price behavior. Unlike earlier studies, this work focuses on homogeneous and fungible commodities. This avoids aggregation problems, and it allows the use of direct measures of units produced, rather than inferences from dollar sales. Also, I estimate Euler equations and allow the marginal value of storage to be a convex function of the stock. This fits the data better, and helps explain the role of storage. Finally, I use futures prices to directly measure the marginal value of storage. I find a production-smoothing role for inventories only for heating oil, and during periods of low or normal prices. A more important role is to reduce marketing costs.

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File URL: http://hdl.handle.net/1721.1/2297
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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 3133-90..

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Date of creation: 1990
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Handle: RePEc:mit:sloanp:2297
Contact details of provider: Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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  1. 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.
  2. Williams, Jeffrey, 1987. "Futures Markets: A Consequences of Risk Aversion or Transactions Costs?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1000-1023, October.
  3. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
  4. Martin S. Eichenbaum, 1988. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," NBER Working Papers 2523, National Bureau of Economic Research, Inc.
  5. Bresnahan, Timothy F & Suslow, Valerie Y, 1985. "Inventories as an Asset: The Volatility of Copper Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 409-24, June.
  6. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
  7. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June.
  8. Ray C. Fair, 1989. "The Production Smoothing Model is Alive and Well," NBER Working Papers 2877, National Bureau of Economic Research, Inc.
  9. 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.
  10. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
  11. French, Kenneth R., 1983. "A comparison of futures and forward prices," Journal of Financial Economics, Elsevier, vol. 12(3), pages 311-342, November.
  12. 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.
  13. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  14. Eichenbaum, Martin, 1983. "A rational expectations equilibrium model of inventories of finished goods and employment," Journal of Monetary Economics, Elsevier, vol. 12(2), pages 259-277.
  15. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  16. Olivier J. Blanchard & Angelo Melino, 1984. "Cyclical Behavior of Prices and Quantities in the Automobile Market," NBER Working Papers 1325, National Bureau of Economic Research, Inc.
  17. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
  18. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  19. 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.
  20. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
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