The Roles of Inventories Investigated in a Factor Demand Model

Abstract

An ECM is derived from first order conditions of a factor demand model. The role of inventory stock in the long run, i.e. a precautionary measure (according to Holt, Modigliani, Muth and Simon (1960)), and/or the role as a production factor (Kydland and Prescott (1982), Christiano (1988)) are investigated. French data from five industrial sectors (1970.I-1992.IV) are used for the analyses. The results indicate that neither the role as a precautionary measure nor the role of a production factor is rejected.

Keywords: factor demand, inventories, production factor

JEL Classification: C32, D21, D24