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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

An Analysis of the Production : Smoothing Model Usting Physical-Product Data

Vol.15, No.4, December , 21–54


English Version |  Korean Version
  •   (Ewha Womans University)

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Abstract  

The production smoothing model of inventory investment implies that (1) production should be less variable than sales, and (2) production decisions should be made independently of sales fluctuations. Previous researches typically found that these implications are rejected by the data. This paper notes that for most products the level of inventory holding is low, with production and sales moving closely with each other. The main hypothesis of this paper is that production smoothing motives will be evident only among the products with sufficiently large inventory holdings. Empirical results of this paper support this hypothesis. The ratio of sales variance to production variance is greater and the separation of production and sales is more complete, the greater the level of inventory holdings. This result provides an explanation on why the production smoothing model is rejected particularly for aggregate data.


Keywords
   Inventory, Production Smoothing Model, Physical-Product Data,Variance Bounds, Random Walk

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