Short-term industry output behavior: an econometric analysis

Abstract

Econometric analysis of short-term industry output and inventory behavior has used one of three alternative specifications: (a) the linear decision rule (LDR) approach based on an optimizing hypothesis e.g. cost minimization or profit maximization, (b) the stock adjustment approach based on production variations in response to business cycles, capacity adjustments and seasonality factors and (c) the recursive approach based on a causal-chain interpretation of the dependence of output, inventory and unfilled orders. Thus the LDR approach [2,3,6,9,10] in its different variants has empirical relevance of forecast variables like future order rates along with lagged values of production and inventory level, whereas the stock adjustment approach [1,13] demonstrates the nonlinear relationships between sales fluctuations and production decisions through estimates of piece-wise linear functions showing the effects of cyclical fluctuations and capacity variations. The recursive approach [20] considers however a specific form of the simultaneous equations model containing the endogenous variables: output, inventory and unfilled orders such that the interdependence between the three LDR for output, inventory and unfilled order is limited.