Joint Production, Quasi-Fixed Factors of Production, and Investment in Finished Goods Inventories

Abstract

INVENTORY INVESTMENT has long been an important area of inquiry for empirical work in macroeconomics. This is due in large measure to the fact that inventory investment is a major source of fluctuations in aggregate output. Empirical work on inventories, however, has been dominated by the use of simple, univariate flexible accelerators. 1 The major objective of this paper is to propose and test a multivariate flexible accelerator model for inventory investment. The model is tested with data on finished goods inventories from the manufacturing sector of the U.S. economy. There are two reasons for undertaking such a task. First, at a theoretical level, a univariate flexible accelerator model asserts that investment in, say, finished goods inventories is proportional to the gap between the desired and actual stocks of finished goods. Such a model presumes that decisions by firms on finished goods inventories are made independently of decisions on other stocks. But, theory suggests that when firms make simultaneous decisions on a variety of stocks, which includes not only finished goods but also goods-in-process inventories, the size of the work force, etc., decisions on finished goods will interact with decisions on