The response of manufacturers' inventory holdings to changes in the volume of sales and the backlog of unfilled orders is examined on a quarterly basis for the period 1948-55 within a buffer-stock flexible accelerator framework. The hypothesis that manufacturers successfully hedge against increases in the price of purchased materials, enlarging their stocks in advance of actual price increases, is rejected. By introducing explicitly the impact of prediction errors it is possible to infer that manufacturers tend to underestimate actual changes in sales volume, but by a surprisingly small amount. An analysis of discrepancies between desired and actual inventory holdings reveals that manufacturers tolerated sizable deficiencies in stocks throughout the Korean conflict.

A preliminary draft of this paper was presented at the Decemnber, 1971 meetings of the Econometric Society. This paper has benefited from the perceptive comments of a number of readers; I am particularly indebted to Ronald Bodkin, Stewart Gillmor, Zvi Griliches, Sherwin Rosen and the referees. Assistance in data compilation was provided by Peter Brubaker, Maureen Donahoe, Charles Eckert, Marshall E. Goldman, Stephen Kalos, Lawrence Kenny, Richard LeClair, and Thurman Northcross. Computations were executed on the Wesleyan University IBM 1130 computer. Research support has been provided by Wesleyan University and National Science Foundation Research Grant GS 2903.

A multi-sector buffer-stock inventory model is developed in an attempt to resolve the problem of aggregation involved in deriving implications for the stability of the economy from a consideration of inventory practices of individual firms. It is demonstrated that stability depends upon a multitude of parameters, some of which are suppressed in aggregative model construction. The economy is necessarily unstable when perfect, if myopic expectations are assumed. With naive expectations stability becomes a definite possibility, particularly if firms attempt only a delayed adjustment of inventories to the equilibrium level. Although the empirical evidence marshaled in order to illustrate the application of the theorems does not prove sufficiently accurate to permit precise conclusions, it is apparent that the conditions for stability may well be satisfied for reasonable values of the system's parameters. Tax schemes which have been suggested as means of stabilizing fluctuations in inventory investment are appraised in the concluding section.

This paper reviews evidence on the structure of anticipation from a number of empirical studies. Jack Muth's "rational expectations hypothesis" is compared with a variety of alternative models, including Ferber's Law, the "implicit expectations" model of Edwin Mills, and Muth's new "errors in the variables" model. The cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations. This implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational; instead, it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated. Copyright 1986 by American Economic Association.

Journal Article Inventories, Production Smoothing, and the Flexible Accelerator Get access Paul Darling, Paul Darling Bowdoin College Search for other works by this author on: Oxford Academic Google Scholar Michael C. Lovell Michael C. Lovell Wesleyan University Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 85, Issue 2, May 1971, Pages 357–362, https://doi.org/10.2307/1880712 Published: 01 May 1971