Modelling manufacturing inventories

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 02 December 2005

Working Paper No. 284
By John D Tsoukalas

This paper presents and applies a stage-of-fabrication inventory model to the UK manufacturing sector. The model emphasises the interaction between input (raw materials and work-in-process) and output (finished goods) inventories. This interaction is an important empirical regularity and proves critical for the ability of the model to fit the data. Decisions about input and output inventory investment cannot be considered in isolation from each other, but must be analysed jointly. Overall, the stage-of-fabrication model receives considerable support. Maximum likelihood estimation of the model’s decision rules yields correctly signed and significant parameter estimates. In terms of producer behaviour, the results imply rising marginal costs of production and significant costs of adjusting production.

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