Working Paper: NBER ID: w0491
Authors: Alan J. Auerbach; Jerry R. Green
Abstract: 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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disaggregation of inventories (C43) | understanding of inventory dynamics (C69) |
| different types of inventories (Y90) | response to economic shocks (E32) |
| interaction between inventories (C69) | production decisions (L23) |
| variable production costs (D24) | inventory management (M11) |
| higher adjustment costs (J32) | less responsive inventory strategies (C69) |
| expectations about sales fluctuations (D84) | inventory responses (L81) |
| sales fluctuations (L81) | operational strategies across industries (L19) |