Working Paper: NBER ID: w1257
Authors: Alan S. Blinder
Abstract: 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.
Keywords: production smoothing; inventory behavior; econometric estimates
JEL Codes: E22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| variance of detrended production (vary) (E23) | variance of detrended sales (varx) (C22) |
| sales change (L81) | inventory change (L81) |
| inventory change (L81) | sales change (L81) |
| sales deviations (C29) | inventory adjustments (L81) |