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Components of Manufacturing Inventories


  • Alan J. Auerbach
  • Jerry R. Green


This paper presents a structural model of production and inventory accumulation based on the hypothesis of cost minimization. It differs from previous attempts in several respects. First, it integrates the analysis of input inventories with output inventories, treating the two stocks separately. Second, it distinguishes between temporary and permanent fluctuations in sales as they are anticipated by the industry. Third, it allows for a more general structure of adjustment costs, and in particular for a cost changing the production level rather than only for deviations of the production level from a fixed target. Empirically, there are three principal conclusions. This model performs much better than those with no cost of production adjustment allowed. Disaggregation of inventories provides significant insights into the dynamics of the adjustment process. However, the restrictions on our model implied by the continuous-time stochastic control theory that we utilize are rejected by the data. We believe that a more disaggregated specification or a more detailed econometric treatment of the discrete-time nature of the observations would avoid this difficulty.

Suggested Citation

  • Alan J. Auerbach & Jerry R. Green, 1980. "Components of Manufacturing Inventories," NBER Working Papers 0491, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0491
    Note: EFG

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    References listed on IDEAS

    1. Blinder, Alan S. & Fischer, Stanley, 1981. "Inventories, rational expectations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 277-304.
    2. 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.
    3. 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.
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    Cited by:

    1. 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.
    2. Humphreys, Brad R. & Maccini, Louis J. & Schuh, Scott, 2001. "Input and output inventories," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 347-375, April.
    3. Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 431-453.

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