The rational expectations equilibrium inventory model. Theory and applications (Q1187681)

[The articles of this volume will not be indexed individually.] The book consists of six essays of which four have been presented at a conference on Inventory Research at the Wesleyan University in June 1987. The contributors develop and/or apply rational expectations equilibrium models to study the time series behaviour of production, sales, inventories, and prices. Extensions of the inventory model by \textit{C. C. Holt}, \textit{F. Modigliani}, \textit{J. F. Muth} and \textit{H. A. Simon} [``Planning production, inventory and workforce'' (Englewood Cliffs 1960)] are presented that account for discounting, an infinite planning horizon, stochastic shocks to production, storage etc. and for rational expectations. Usually firms hold inventories to smooth production or changes in production, to avoid stockouts and to allow for optimal pricing. The extensions of the standard approach are theoretically derived and are confronted with the ``stylized facts'' identified by \textit{A. S. Blinder} [Q. J. Econ. 101, 431-454 (1986)]; the variance of production exceeds the variance of sales: the covariance between sales and inventory investments is positive, and ``speed of adjustment'' estimates from partial adjustment investment equations are unrealistically slow. The first two chapters are theoretical in nature. In chapter I the editor presents a linear rational expectations inventory model to serve as an introduction to the other papers. \textit{S. R. Aiyagari}, \textit{Z. Eckstein}, and \textit{M. Eichenbaum} are responsible for chapter II [``Inventories and price fluctuations under perfect competition and monopoly''], in which they develop a linear RE- inventory model which includes nonnegativity constraints on inventories. The model is developed for a competitive industry as well as for a monopoly. They conclude that the constraint is occasionally binding depending on the relationship between a reservation and the actual price. The remaining four chapters are empirical: \textit{L. J. Christiano} and \textit{M. Eichenbaum} analyze in chapter III [``Temporal aggregation and the stock adjustment model of inventories''] the problem of temporal aggregation and stock adjustment to give an answer to whether temporal aggregation bias can account for the slow speed of adjustment. Using a continuous and discrete time version model they conclude that temporal aggregation bias may significantly distort ``speed of adjustment'' estimates. \textit{S. P. Dimelis} and \textit{T. Kollintzas} apply in chapter IV [``A linear rational expectations equilibrium model for the American petroleum industry''] a linear RE-inventory model to the U.S. petroleum industry. For this industry production smoothing is confirmed and the speed of adjustment-coefficient is of reasonable size. Chapter IV by \textit{J. A. Miron} and \textit{S. P. Zeldes} [``Seasonality, cost shocks, and the production smoothing model of inventories''], already published in Econometrica 56, 877-908 (1988), investigate whether only the production smoothing motive for holding inventories can explain the stylized fact that the variance of production exceeds that of sales. The final chapter VI by \textit{K. West} [``Order backlogs and production smoothing''] investigates whether the inability of linear RE-inventory models that exclude optimal pricing consideration and ignore stochastic shocks to account for the first two of the above mentioned stylized facts is due to ignoring backlogs. Finally, it should be noted that the essays are highly specalized and may, therefore, be primarily of interest to researchers in business cycle theory and applied industrial organization.