Can the Production Smoothing Model of Inventory Behavior be Saved?
The production smoothing model of inventory behavior has a long and venerable history, and theoretical foundations which seem very strong. Yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework, but actually to argue that the basic idea of production smoothing is all wrong. Most prominent wnong these is the fact that the variance of detrended production exceeds the variance of detrended sales.This paper first documents the stylized facts. Then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts. Next, estimates of stock adjustment equations derived from the theory are presented and evaluated. Finally, it reviews the theoretical and empirical evidence and tries to drawsome tentative conclusions
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20 industries aggregate Alan Alex Kane autocorrelation autoregression Blinder buffer stock role concave cost shocks cov(X,AN covariance between sales demand disturbances demand shock denote desired inventory distributed lags econometric Electrical machinery empirical estimated adjustment speeds Fabricated metals finished goods inventories firm inventory behavior inventory change inventory equation inventory stock likelihood ratio tests manufacturing industries marginal cost materials and supplies materials costs model of inventory NBER negative neoclassical economic nondurable sectors Nt+1 output paper parameters period Primary metals production function production smoothing model production smoothing/buffer stock progress regressions retail sales and inventory Section serial correlation shadow value shipments significant smooth production smoothing/buffer stock model specification speed of adjustment spoo stochastic stock of inventories stylized facts Table theoretical ti-T transportation equipment type of inventory unexpected sales unfilled orders var(Y variables variance of detrended variance of sales variance ratio wages zero Zvi Griliches