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Durable Goods Production and Inventory Dynamics: An Application to the Automobile Industry

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  • James Kahn

    (Yeshiva University)

  • Adam Copeland

    (Federal Reserve Bank of New York)

Abstract

This paper develops a model of the joint determination of production, inventories and pricing of a monopolistically competitive durable good.producer. The model gives rise to time-varying markups that interact with the inventory-sales ratio, even with flexible prices. Maximum likelihood estimation with automobile industry data yields plausible parameter estimates and impulse responses. We then apply the model to analyze the impact of the "Cash-for-Clunkers" program, and ÃÂfind that the model predicts a negligible production response; essentially all the action is inventories. This leads us to consider evidence of threshold effects that imply a stronger response very far from the steady state. This results in a modest but more plausible production response to the policy--still modest in comparison to the sales impact, but now at least measurable. Even with some production response, the results still provide a cautionary tale for countercyclical policies that rely on stimulating consumer spending. Even an impact on spending need not translate into a comparable impact on employment and output.

Suggested Citation

  • James Kahn & Adam Copeland, 2012. "Durable Goods Production and Inventory Dynamics: An Application to the Automobile Industry," 2012 Meeting Papers 270, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:270
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    References listed on IDEAS

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    1. Igal Hendel & Aviv Nevo, 2006. "Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.
    2. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    3. James A. Kahn & Mark Bils, 2000. "What Inventory Behavior Tells Us about Business Cycles," American Economic Review, American Economic Association, vol. 90(3), pages 458-481, June.
    4. Adam Copeland & George Hall, 2011. "The response of prices, sales, and output to temporary changes in demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 232-269, March.
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    6. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 481-510.
    7. Dennis W. Carlton, 1983. "Equilibrium Fluctuations When Price and Delivery Lag Clear the Market," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 562-572, Autumn.
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