Gramlich and Galper (hereafter referred to as GG) indeed have performed a useful service by pointing out that an erroneous equation was included in my paper [3]. The corrected inventory change equation, the equation with all lagged orders included, was almost identical with the results obtained by applying GG's method (ii) to the order-inventory stock equation presented in Column (2), Table IV of my paper [3, p. 161]. The results are consistent when GG's methods (ii) and (iii) are applied on the correct equations. In any case, GG's methods (ii) and (iii) are well known and deserve no debate here. However, the same cannot be said of their method (i). GG's method (i) is based on two crucial assumptions concerning the pattern of the production process and inventories of defense products. The validity of using the method to derive the coefficients of an inventory change equation from an order-shipment relationship depends directly on these assumptions. If the assumptions describe exactly the actual patterns of the production process and of inventory build-up, then method (i) can be used for GG's purpose. Unfortunately, both of these assumptions are very unrealistic, and the use of method (i) yields misleading results. In their derivation of method (i), GG assume that the production process is rectangular. Furthermore, the authors claim that the method is valid regardless of what is assumed about the shape of the production process-a rectangular assumption serves as well as any.' This claim is faulty, as the following example demonstrates.

This paper reports on a study of the timing of the economic impact of government defense procurement. By assuming that the letting of new orders signals the beginning and shipments signal the end of the impact of defense procurement, this research investigates the effects of changes in product mix and capacity utilization on the duration of such impacts. The effects of changes in product mix and capacity utilization on inventory accumulation are also investigated. RECENT DISCUSSIONS on econometric model building have pointed out that the development of a realistic model of the government sector is a prerequisite to the effective use of econometric models in evaluating the impact of government operations on the economy [7]. There are two aspects to this problem: (i) An econometric model should include appropriate instrumental variables-variables that can be controlled by policy makers [11], and (ii) the model should properly capture the impact of the government actions [2, 3,5,13]. This paper presents an explanatory study related to the second aspect of the above problem. Since defense procurement accounts for nearly ten per cent of GNP, a question which naturally arises is: Can defense procurement be manipulated by the government to help stabilize economic activity or to offset cyclical fluctuations? It is to be expected that the timing of defense procurement is determined primarily by noneconomic considerations. In peace time, however, a certain degree of flexibility is presumed to exist in the scheduling of defense procurement. For this reason, defense procurement is a useful instrumental variable for an econometric model of the government sector. In considering defense procurement as an instrumental variable, the following question is raised: What stage in the defense procurement process is most important from the viewpoint of measuring its impact on economic activity? In their studies of inventory investment, Lovell and Suits [10, 12] emphasized that the Department of Defense orders have an immediate impact upon inventories in advance of its expenditures. In a substantial number of other econometric models, however, the impact of defense procurement was measured at the expenditure stage [4,6,8,9].