The stock/output ratio in the UK economy has declined sharply in the 1980s. This article analyses the decline and discusses the reasons why firms hold different types of stocks and what influences these holdings. The article argues that changes in the financial environment facing firms and in particular the effects of the tax system and the behaviour of real interest rates have been an important determinant of stocks. An empirical model for the manufacturers' finished goods and work in progress category which includes these financial effects is summarised in an appendix.
Stock building behaviour in the United Kingdom