Inventories, Factor Demand and Capacity Utilization: The Long and Short Run Structure

21 Pages Posted: 10 Oct 2011

Date Written: July 9, 1997

Abstract

An ECM is derived from first order conditions of a factor demand model. Decisions on inventory stock and capacity utilization are (endogenously) modeled, by which a large system of equations results. Within this system the exogeneity of real factor prices as well as sales is tested. The role of inventor stock in the long run, i.e. as a precautionary measure (according to Holt, Modigliani, Muth and Simon (1960)) or as a production factor (Kydland and Prescott (1982), Christiano (1988)) are further investigated by impulse response functions. For French industrial sectors (1970.I-1992.IV) inventory stocks turn out to be both a decision variable as well as a residual. The precautionary measure is not rejected, but a linear-quadratic specification seems not to hold. Further, no strong evidence is found for the inventory stock as a production factor.

Keywords: factor demand, inventories, capacity utlization, time series, impulse response

JEL Classification: C32, C5, E22

Suggested Citation

Peeters, Marga, Inventories, Factor Demand and Capacity Utilization: The Long and Short Run Structure (July 9, 1997). Available at SSRN: https://ssrn.com/abstract=1941230 or http://dx.doi.org/10.2139/ssrn.1941230

Marga Peeters (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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