Page 1. DAVID G. BIVIN Input and output inventories in a disaggregated macro-model 1. Introductio... more Page 1. DAVID G. BIVIN Input and output inventories in a disaggregated macro-model 1. Introduction Economists have long recognized the predominant role of inventory investment in business cycles. Lawrence Klein and Joel ...
at Zndianapolis *I am grateful to Khan A. Mohabbat and the participants at the Indiana University... more at Zndianapolis *I am grateful to Khan A. Mohabbat and the participants at the Indiana University (Bloomington) Business and Economics Workshop for their comments and suggestions. 'For work on this topic, see Auerbach and Green (1980), and Bivin (1986a, 1987). Abramovitz (1950) is also relevant.
Page 1. Inventories and Interest Rates: A Critique of the Buffer Stock Model By David G. Bivin* E... more Page 1. Inventories and Interest Rates: A Critique of the Buffer Stock Model By David G. Bivin* Economists have devoted a great deal of effort in recent years toward demonstrating that inventories are inversely related to the interest ...
International Journal of Production Economics, Oct 1, 2013
A production chain's aggregate output volatility depends upon a number of factors including the n... more A production chain's aggregate output volatility depends upon a number of factors including the number of firms in a chain, the management strategy of the firms, the point at which products are differentiated, lead times, and the persistence of demand shocks. The influence of these factors is quantified here with an N-firm model of the production chain. Under pure production-to-stock (PTS), the firms in the chain respond simultaneously to a demand shock producing a positive covariance across firms that raises aggregate volatility. Under production to order (PTO), the chain's response to a demand shock is staggered but when demand shocks are persistent there is a catch-up effect that raises the volatility of each firm's production above that of a firm that under PTS. Nevertheless, PTO chains typically exhibit less volatility than PTS chains thanks to the covariance effect. Further simulations demonstrate that the production chain stabilizes as the number of production cycles in an observation period increases.
This paper estimates models of output, price and total inventory in various manufacturing sectors... more This paper estimates models of output, price and total inventory in various manufacturing sectors that allow inventories at different stages of fabrication to exert independent influences. The hypothesis tests generally reject the hypotheses that inventories are irrelevant or can be aggregated across stages of fabrication in the output and price models. The hypothesis that raw materials and work-in-process are irrelevant is rejected in about half of the output and price model. In two-thirds of the industries, inventory behavior is independent of the composition of stocks inherited from the previous period. There is considerable evidence that inventory behavior in the manufacturing sector varies by stage of fabrication, but the practical significance of this result has not been fully explored.1 The conclusion is important in its own right because of the predominant role of inventory investment in business cycles and the fact, emphasized by Blinder and Maccini (1991) that raw materials and work-in-process exhibit substantially greater fluctuations than finished goods. They rightly chastise the economics profession for having "barked up the wrong tree" (p. 87) with its emphasis on modeling finished goods. The fact remains, however, that there is little inherent interest in the behavior of raw material and work-in-process. Attention has focused instead on output, price, and total inventories or finished goods. Therefore, the significance of disaggregation ultimately rests on whether or not it improves our understanding of these vari-*This paper was completed while the author was on leave at the Universitaire Faculteiten St.-Ignatius, Centrum voor Bedrijfseconomie en Bedrijfseconometrie, Antwerpen (UFSIA) and the Groupe de Recherche en Economic Applique at the Universitd de Mons, and was sponsored by the NFWO/FNRS (the Belgian National Fund of Scientific Research). The author is grateful to Gang Yi for his econometric insights.
Maccini, Moore, and Schaller (2004, hereafter MMS) recently uncovered a long-run inverse relation... more Maccini, Moore, and Schaller (2004, hereafter MMS) recently uncovered a long-run inverse relationship between interest rates and finished goods in a number of nondurables industries and the nondurables sector overall. Their primary innovation is a regime-switching model of the real interest rate. This paper extends that model to include work-in-process and raw material inventories as well as industries that produce to order. A cointegrating model similar to that of MMS is then estimated for all three types of inventories and all industries in both the durables and nondurables sectors. The results reinforce the MMS conclusion of a long-run inverse relationship between the real interest rate and finished goods during the 1967-1997 period. But the results for the durables sectors, work-in-process and raw materials, and the 1997-2007 period are generally much less supportive. Moreover, results for the manufacturing aggregates suggest that the overall responses are small.
International Journal of Production Economics, 2003
ABSTRACT When the profit function is too complex to maximize directly, firms must rely on some ot... more ABSTRACT When the profit function is too complex to maximize directly, firms must rely on some other performance criterion to guide work station activity. Simplification is achieved by emphasizing either flow or stock management. Flow management seeks to ensure that no work station is “starved” by available inputs. Stock management seeks to minimize inventories. This paper develops a model to assess the performance of these two approaches for a firm that can carry both input and output inventories. The model includes shocks to both demand and production and the possibility of a stockout is explicitly reflected in the optimization problem. Stock management dominates flow management when carrying costs are sufficiently large. When carrying costs are moderate, the strategy of simply ignoring shocks to demand and capacity dominates both stock and flow management. The flow-management approach is superior only when carrying costs are very small.
This note explains why inventories might rise with interest rates. Higher real interest rates not... more This note explains why inventories might rise with interest rates. Higher real interest rates not only increase the carrying cost of inventories they also reduce the present value of the markup on delayed sales. When the markup is large enough, it is profitable to increase stocks in order to avoid sales delays. Another possibility is that the firm has an incentive to smooth its total stocks so that an increase in the real interest rate causes finished goods to fall but the reduction is partially offset by an increase in raw materials.
Two variance decompositions are employed to identify those factors that account for the enhanced ... more Two variance decompositions are employed to identify those factors that account for the enhanced stability of GDP since 1984. Smaller direct shocks to GDP account for most of the stabilization and inventory investment and residential fixed investment exhibit the greatest stabilization.
Page 1. Rationales for the Dual Existence of Finished Goods and Raw Materials Inventories* DAVID ... more Page 1. Rationales for the Dual Existence of Finished Goods and Raw Materials Inventories* DAVID G. BIVIN Indiana University at Indianapolis Indianapolis, Indiana I. Introduction The willingness of firms to maintain finished ...
ABSTRACT The explanatory and predictive abilities of the infinite-horizon linear-quadratic invent... more ABSTRACT The explanatory and predictive abilities of the infinite-horizon linear-quadratic inventory model are gauged using the flexible-accelerator model as a baseline. Tests of explanatory power for six nondurables industries indicate that the flexible accelerator has superior explanatory power for inventories and output in the majority of industries. Tests of predictive ability during the late 1990s also support the superiority of the flexible-accelerator model.
As a rule, models of output and inventory behavior posit a very simple and mechanical view of the... more As a rule, models of output and inventory behavior posit a very simple and mechanical view of the production process. This paper proposes a more sophisticated model in which the production lag is a decision variable. The primary goal is to develop a model of work-in-...
This paper demonstrates that the variance of flows within the production process declines as the ... more This paper demonstrates that the variance of flows within the production process declines as the products move downstream from raw material deliveries toward completion. Thus, the production process magnifies and transmits shocks within an industry to that industry's suppliers.
The thesis develops an optimization model of firm behavior in which the firm is assumed to maximi... more The thesis develops an optimization model of firm behavior in which the firm is assumed to maximize profits by setting inventories, price, and output at the beginning of each period subject to initial conditions (e.g., initial inventories) and expected demand. The model departs from standard models of inventory investment in three respects. First, the objective of the firm is the maximization of profits rather than the minimization of costs. The use of profit maximization removes the inconsistency associated with cost minimization models in which the firm is operating in a perfectly competitive market and yet somehow possesses a demand constraint. Additionally, it allows for the construction and estimation of a price equation. The second departure is the explicit rejection of the buffer stock motive in the construction of the objective function. Typically, the buffer stock motive is introduced directly into the inventory cost function. The philosophy of this thesis is that if such a motive is appropriate, it should arise naturally out of the firm\u27s attempts to maximize profits. Finally, the model developed in the thesis differs from standard models of inventory investment in that the admissible parameter space is rigorously specified. Typically, parameter space restrictions are dictated by intuition rather than theory. The use of intuition is necessitated either by the lack of an underlying structure or by the complexity of the model. However, given the imperfect relationship between intuition and reality, the use of this methodology has led to the acceptance of counterintuitive results, or the incorrect specification of the admissible parameter space. The formulation yields a reduced-form system in which output and price are expressed as linear functions of the lagged rate of production, lagged inventory holdings, lagged unfilled orders, and expected new orders in the current and following periods. The most interesting aspect of the derived parameter space restrictions is the rejection of the buffer stock motive. Rather, the theory implies that, with a finite horizon and positive unit quadratic costs of production, an increase in the steady state level of new orders will yield a decline in the steady state level of inventories. This is the result of increasing marginal costs which implies that firms will utilize all of the tools at its disposal in response to a perceived shift in its demand curve. The theory is tested through the use of a standard F-test in which the residual sum of squares for the constrained model is compared to the residual sum of squares obtained through unconstrained generalized least squares estimation. Since the null hypothesis is composite, the constrained estimates are obtained through an iterative procedure rather than by standard linear programming techniques. The data are real seasonally adjusted quarterly observations covering the period 1959:II-1977:IV for the 20 two-digit SIC manufacturing industries. Initial results indicated the presence of structural change in virtually all of the industries. As a result, each of the samples were divided into two sub-periods: 1959:II-1968:IV and 1969:I-1977:IV. In total there were 35 samples appropriate for testing. The tests were conducted at the five percent level of significance. Of the 35 samples, 25 could not be rejected at this level. For the first sub-period, ten of the 18 samples could not be rejected, and for the second sub-period, 15 of the 17 samples could not be rejected
The durables manufacturing sector is modeled as a production chain consisting of firms that produ... more The durables manufacturing sector is modeled as a production chain consisting of firms that produce to order and firms that produce to stock. Output movements are driven solely by shocks to final demand. Separate demand models are estimated over four separate sub-samples spanning the 1967-2011 period. Simulations indicate that changes in the volatility of output can be explained as a by-product of changes in demand behavior without appealing to innovations in production management. The best evidence of innovations in production management that remains are declines in work-in-process and unfilled orders that began in the 1990s–well into the Great Moderation.
International Journal of Production Economics, Sep 1, 2006
ABSTRACT McConnell and Perez–Quiros have recently provided evidence that the growth rate of GDP h... more ABSTRACT McConnell and Perez–Quiros have recently provided evidence that the growth rate of GDP has stabilized since 1984. They conclude that the enhanced stability can be attributed to improvements in inventory management in the durables sector. This study examines the behavior of output in two-digit SIC manufacturing industries in an effort to determine whether this increase in stability is evident in less aggregated data. After accounting for changes in demand volatility, output stabilized in four of the six 2-digit durables industries modeled here. Total durables output stabilized by 9%. These improvements appear to be the result of milder short-run output responses to demand shocks. This suggests that output has become less responsive to demand shocks and casts doubt on enhanced flexibility of production that should be characteristic of improved production management.
In the recent past, a great deal of faith has been placed in the idea that the performance of the... more In the recent past, a great deal of faith has been placed in the idea that the performance of the hospital industry could be improved significantly by relying more heavily on profit incentives. This article considers the effect of profit incentives on hospital behavior and finds that the existence of profit incentives has not led the for-profit hospitals in the sample to behave in significantly different economic fashions than the nonprofits.
Page 1. DAVID G. BIVIN Input and output inventories in a disaggregated macro-model 1. Introductio... more Page 1. DAVID G. BIVIN Input and output inventories in a disaggregated macro-model 1. Introduction Economists have long recognized the predominant role of inventory investment in business cycles. Lawrence Klein and Joel ...
at Zndianapolis *I am grateful to Khan A. Mohabbat and the participants at the Indiana University... more at Zndianapolis *I am grateful to Khan A. Mohabbat and the participants at the Indiana University (Bloomington) Business and Economics Workshop for their comments and suggestions. 'For work on this topic, see Auerbach and Green (1980), and Bivin (1986a, 1987). Abramovitz (1950) is also relevant.
Page 1. Inventories and Interest Rates: A Critique of the Buffer Stock Model By David G. Bivin* E... more Page 1. Inventories and Interest Rates: A Critique of the Buffer Stock Model By David G. Bivin* Economists have devoted a great deal of effort in recent years toward demonstrating that inventories are inversely related to the interest ...
International Journal of Production Economics, Oct 1, 2013
A production chain's aggregate output volatility depends upon a number of factors including the n... more A production chain's aggregate output volatility depends upon a number of factors including the number of firms in a chain, the management strategy of the firms, the point at which products are differentiated, lead times, and the persistence of demand shocks. The influence of these factors is quantified here with an N-firm model of the production chain. Under pure production-to-stock (PTS), the firms in the chain respond simultaneously to a demand shock producing a positive covariance across firms that raises aggregate volatility. Under production to order (PTO), the chain's response to a demand shock is staggered but when demand shocks are persistent there is a catch-up effect that raises the volatility of each firm's production above that of a firm that under PTS. Nevertheless, PTO chains typically exhibit less volatility than PTS chains thanks to the covariance effect. Further simulations demonstrate that the production chain stabilizes as the number of production cycles in an observation period increases.
This paper estimates models of output, price and total inventory in various manufacturing sectors... more This paper estimates models of output, price and total inventory in various manufacturing sectors that allow inventories at different stages of fabrication to exert independent influences. The hypothesis tests generally reject the hypotheses that inventories are irrelevant or can be aggregated across stages of fabrication in the output and price models. The hypothesis that raw materials and work-in-process are irrelevant is rejected in about half of the output and price model. In two-thirds of the industries, inventory behavior is independent of the composition of stocks inherited from the previous period. There is considerable evidence that inventory behavior in the manufacturing sector varies by stage of fabrication, but the practical significance of this result has not been fully explored.1 The conclusion is important in its own right because of the predominant role of inventory investment in business cycles and the fact, emphasized by Blinder and Maccini (1991) that raw materials and work-in-process exhibit substantially greater fluctuations than finished goods. They rightly chastise the economics profession for having "barked up the wrong tree" (p. 87) with its emphasis on modeling finished goods. The fact remains, however, that there is little inherent interest in the behavior of raw material and work-in-process. Attention has focused instead on output, price, and total inventories or finished goods. Therefore, the significance of disaggregation ultimately rests on whether or not it improves our understanding of these vari-*This paper was completed while the author was on leave at the Universitaire Faculteiten St.-Ignatius, Centrum voor Bedrijfseconomie en Bedrijfseconometrie, Antwerpen (UFSIA) and the Groupe de Recherche en Economic Applique at the Universitd de Mons, and was sponsored by the NFWO/FNRS (the Belgian National Fund of Scientific Research). The author is grateful to Gang Yi for his econometric insights.
Maccini, Moore, and Schaller (2004, hereafter MMS) recently uncovered a long-run inverse relation... more Maccini, Moore, and Schaller (2004, hereafter MMS) recently uncovered a long-run inverse relationship between interest rates and finished goods in a number of nondurables industries and the nondurables sector overall. Their primary innovation is a regime-switching model of the real interest rate. This paper extends that model to include work-in-process and raw material inventories as well as industries that produce to order. A cointegrating model similar to that of MMS is then estimated for all three types of inventories and all industries in both the durables and nondurables sectors. The results reinforce the MMS conclusion of a long-run inverse relationship between the real interest rate and finished goods during the 1967-1997 period. But the results for the durables sectors, work-in-process and raw materials, and the 1997-2007 period are generally much less supportive. Moreover, results for the manufacturing aggregates suggest that the overall responses are small.
International Journal of Production Economics, 2003
ABSTRACT When the profit function is too complex to maximize directly, firms must rely on some ot... more ABSTRACT When the profit function is too complex to maximize directly, firms must rely on some other performance criterion to guide work station activity. Simplification is achieved by emphasizing either flow or stock management. Flow management seeks to ensure that no work station is “starved” by available inputs. Stock management seeks to minimize inventories. This paper develops a model to assess the performance of these two approaches for a firm that can carry both input and output inventories. The model includes shocks to both demand and production and the possibility of a stockout is explicitly reflected in the optimization problem. Stock management dominates flow management when carrying costs are sufficiently large. When carrying costs are moderate, the strategy of simply ignoring shocks to demand and capacity dominates both stock and flow management. The flow-management approach is superior only when carrying costs are very small.
This note explains why inventories might rise with interest rates. Higher real interest rates not... more This note explains why inventories might rise with interest rates. Higher real interest rates not only increase the carrying cost of inventories they also reduce the present value of the markup on delayed sales. When the markup is large enough, it is profitable to increase stocks in order to avoid sales delays. Another possibility is that the firm has an incentive to smooth its total stocks so that an increase in the real interest rate causes finished goods to fall but the reduction is partially offset by an increase in raw materials.
Two variance decompositions are employed to identify those factors that account for the enhanced ... more Two variance decompositions are employed to identify those factors that account for the enhanced stability of GDP since 1984. Smaller direct shocks to GDP account for most of the stabilization and inventory investment and residential fixed investment exhibit the greatest stabilization.
Page 1. Rationales for the Dual Existence of Finished Goods and Raw Materials Inventories* DAVID ... more Page 1. Rationales for the Dual Existence of Finished Goods and Raw Materials Inventories* DAVID G. BIVIN Indiana University at Indianapolis Indianapolis, Indiana I. Introduction The willingness of firms to maintain finished ...
ABSTRACT The explanatory and predictive abilities of the infinite-horizon linear-quadratic invent... more ABSTRACT The explanatory and predictive abilities of the infinite-horizon linear-quadratic inventory model are gauged using the flexible-accelerator model as a baseline. Tests of explanatory power for six nondurables industries indicate that the flexible accelerator has superior explanatory power for inventories and output in the majority of industries. Tests of predictive ability during the late 1990s also support the superiority of the flexible-accelerator model.
As a rule, models of output and inventory behavior posit a very simple and mechanical view of the... more As a rule, models of output and inventory behavior posit a very simple and mechanical view of the production process. This paper proposes a more sophisticated model in which the production lag is a decision variable. The primary goal is to develop a model of work-in-...
This paper demonstrates that the variance of flows within the production process declines as the ... more This paper demonstrates that the variance of flows within the production process declines as the products move downstream from raw material deliveries toward completion. Thus, the production process magnifies and transmits shocks within an industry to that industry's suppliers.
The thesis develops an optimization model of firm behavior in which the firm is assumed to maximi... more The thesis develops an optimization model of firm behavior in which the firm is assumed to maximize profits by setting inventories, price, and output at the beginning of each period subject to initial conditions (e.g., initial inventories) and expected demand. The model departs from standard models of inventory investment in three respects. First, the objective of the firm is the maximization of profits rather than the minimization of costs. The use of profit maximization removes the inconsistency associated with cost minimization models in which the firm is operating in a perfectly competitive market and yet somehow possesses a demand constraint. Additionally, it allows for the construction and estimation of a price equation. The second departure is the explicit rejection of the buffer stock motive in the construction of the objective function. Typically, the buffer stock motive is introduced directly into the inventory cost function. The philosophy of this thesis is that if such a motive is appropriate, it should arise naturally out of the firm\u27s attempts to maximize profits. Finally, the model developed in the thesis differs from standard models of inventory investment in that the admissible parameter space is rigorously specified. Typically, parameter space restrictions are dictated by intuition rather than theory. The use of intuition is necessitated either by the lack of an underlying structure or by the complexity of the model. However, given the imperfect relationship between intuition and reality, the use of this methodology has led to the acceptance of counterintuitive results, or the incorrect specification of the admissible parameter space. The formulation yields a reduced-form system in which output and price are expressed as linear functions of the lagged rate of production, lagged inventory holdings, lagged unfilled orders, and expected new orders in the current and following periods. The most interesting aspect of the derived parameter space restrictions is the rejection of the buffer stock motive. Rather, the theory implies that, with a finite horizon and positive unit quadratic costs of production, an increase in the steady state level of new orders will yield a decline in the steady state level of inventories. This is the result of increasing marginal costs which implies that firms will utilize all of the tools at its disposal in response to a perceived shift in its demand curve. The theory is tested through the use of a standard F-test in which the residual sum of squares for the constrained model is compared to the residual sum of squares obtained through unconstrained generalized least squares estimation. Since the null hypothesis is composite, the constrained estimates are obtained through an iterative procedure rather than by standard linear programming techniques. The data are real seasonally adjusted quarterly observations covering the period 1959:II-1977:IV for the 20 two-digit SIC manufacturing industries. Initial results indicated the presence of structural change in virtually all of the industries. As a result, each of the samples were divided into two sub-periods: 1959:II-1968:IV and 1969:I-1977:IV. In total there were 35 samples appropriate for testing. The tests were conducted at the five percent level of significance. Of the 35 samples, 25 could not be rejected at this level. For the first sub-period, ten of the 18 samples could not be rejected, and for the second sub-period, 15 of the 17 samples could not be rejected
The durables manufacturing sector is modeled as a production chain consisting of firms that produ... more The durables manufacturing sector is modeled as a production chain consisting of firms that produce to order and firms that produce to stock. Output movements are driven solely by shocks to final demand. Separate demand models are estimated over four separate sub-samples spanning the 1967-2011 period. Simulations indicate that changes in the volatility of output can be explained as a by-product of changes in demand behavior without appealing to innovations in production management. The best evidence of innovations in production management that remains are declines in work-in-process and unfilled orders that began in the 1990s–well into the Great Moderation.
International Journal of Production Economics, Sep 1, 2006
ABSTRACT McConnell and Perez–Quiros have recently provided evidence that the growth rate of GDP h... more ABSTRACT McConnell and Perez–Quiros have recently provided evidence that the growth rate of GDP has stabilized since 1984. They conclude that the enhanced stability can be attributed to improvements in inventory management in the durables sector. This study examines the behavior of output in two-digit SIC manufacturing industries in an effort to determine whether this increase in stability is evident in less aggregated data. After accounting for changes in demand volatility, output stabilized in four of the six 2-digit durables industries modeled here. Total durables output stabilized by 9%. These improvements appear to be the result of milder short-run output responses to demand shocks. This suggests that output has become less responsive to demand shocks and casts doubt on enhanced flexibility of production that should be characteristic of improved production management.
In the recent past, a great deal of faith has been placed in the idea that the performance of the... more In the recent past, a great deal of faith has been placed in the idea that the performance of the hospital industry could be improved significantly by relying more heavily on profit incentives. This article considers the effect of profit incentives on hospital behavior and finds that the existence of profit incentives has not led the for-profit hospitals in the sample to behave in significantly different economic fashions than the nonprofits.
Uploads
Papers by David Bivin