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The long‐run implications of the production smoothing model of inventories: An empirical test
Author(s) -
Rossana R. J.
Publication year - 1993
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950080305
Subject(s) - econometrics , inventory investment , cointegration , smoothing , economics , production (economics) , inflation (cosmology) , short run , investment (military) , empirical research , macroeconomics , statistics , mathematics , physics , politics , theoretical physics , political science , law
This paper provides an empirical test of the long‐run implications of the production smoothing model of inventories, the dominant framework for inventory investment research in the past. Intertemporal models of a firm holding inventories of finished goods predict a long‐run relationship between inventories, shipments, factor input prices, and the real interest rate which is tested here using cointegration test procedures. These tests provide little support for the predictions of the production smoothing model. In most of the data sets used, test statistics indicate that inventories, shipments, factor input prices, the nominal interest rate, and the inflation rate maintain a long‐run equilibrium relationship but parameter estimates of cointegrating vectors are often implausible, typically rejecting hypotheses implied by structural models of the production smoothing motive for holding inventories.