Durable Goods Inventories and the Volatility of Production: A Puzzle

A stylized fact associated with inventory behavior is that durable goods production and inventory investment are about 5 times more volatile than those of nondurable goods. This paper shows that the stockout-avoidance theory of inventories (Kahn, AER 1987) featuring demand uncertainty and production lags is inconsistent with this stylized fact. The predicted variance of production is negatively related to the degree of durability of consumption goods. In particular, production is less variable both absolutely and relative to sales when consumption goods are more durable. In addition, durable goods production can be less variable than sales even under serially correlated demand shocks. These predictions run counter to the data.