Components of Manufacturing Inventories

51 Pages Posted: 25 Mar 2001 Last revised: 17 Jan 2002

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Jerry Green

Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1980

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.

Suggested Citation

Auerbach, Alan Jeffrey and Green, Jerry R., Components of Manufacturing Inventories (June 1980). NBER Working Paper No. w0491. Available at SSRN: https://ssrn.com/abstract=262713

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Jerry R. Green

Harvard University, HBS Negotiations, Organizations and Markets Unit; Dept. of Economics ( email )

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United States
617-495-3950 (Phone)
617-495-6859 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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