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Can the Production Smoothing Model of Inventory Behavior be Saved?

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  • Alan S. Blinder

Abstract

The production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that 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 among 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. Finally, it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions.

Suggested Citation

  • Alan S. Blinder, 1986. "Can the Production Smoothing Model of Inventory Behavior be Saved?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 431-453.
    • Handle: RePEc:oup:qjecon:v:101:y:1986:i:3:p:431-453.
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    References listed on IDEAS

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    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. Akhtar, M A, 1983. "Effects of Interest Rates and Inflation on Aggregate Inventory Investment in the United States," American Economic Review, American Economic Association, vol. 73(3), pages 319-328, June.
    3. 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.
    4. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    5. F. Owen Irvine, 1981. "Specification errors and the stock-adjustment model: why estimated speeds-of-adjustment are too slow in inventory equations," Working Paper Series / Economic Activity Section 14, Board of Governors of the Federal Reserve System (U.S.).
    6. 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.
    7. Alan J. Auerbach & Jerry R. Green, 1980. "Components of Manufacturing Inventories," NBER Working Papers 0491, National Bureau of Economic Research, Inc.
    8. Lieberman, Charles, 1980. "Inventory Demand and Cost of Capital Effects," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 348-356, August.
    9. 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.
    10. Irvine, F Owen, Jr, 1981. "Retail Inventory Investment and the Cost of Capital," American Economic Review, American Economic Association, vol. 71(4), pages 633-648, September.
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