Econometric analysis of inventory investment and the role of short-term expectations

Abstract

This paper considers the dependence of inventory investment on short-term business expectations from an econometric point of view. The subject of the investigation is the input and finished goods inventory investment in the Finish manufacturing industry during 1962–1979. Our basic hypothesis is that favourable expectations accelerate inventory investment and vice versa. This can be justified both by a liquidity hypothesis, based on a sufficiency of revenue income, and by a tax speculation hypothesis, based on the taxational income levelling behaviour of firms. Applied to the classical inventory holding motives developed by Arrow, the hypotheses can be projected in the forms of linear regression equations, which are then estimated by means of the OLS-method. As a result of the estimations, we can conclude that both input and finished goods inventory investment were heavily dependent on short-term expectations. We discovered, however, that these expectations were channelled into input and finished goods inventory investment in different ways.