A Variance Bounds Test of the Linear Quadratic Inventory Model

Kenneth D. West

137 citations0/0 files storedJournal of Political Economy

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Monetary Policy and Economic Impact Supply Chain and Inventory Management Forecasting Techniques and Applications

Abstract

This paper develops and applies a novel test of the Holt et al. linear quadratic inventory model. It is shown that a central property of the model is that a certain weighted sum of variances and covariances of production, sales, and inventories must be nonnegative. The weights are the basic structural parametersof the model. The model may be tested by seeing whether this sum is in fact nonnegative. When the test is applied to some nondurables data aggregated to the two-digit SIC code level, it almost always rejects the model, even though the model does well by traditional criteria.

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2002Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets 1994Inventories and the Short-Run Dynamics of Commodity Prices 1991Labor Demand, Labor Supply, and Employment Volatility 2001Input and output inventories 1988Consumption and Investment 1989Seasonality, Cost Shocks, and the Production Smoothing Model of Inventories 1999Chapter 13 Inventories 2005Understanding the inventory cycle

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