Econometrica: Jul 1961, Volume 29, Issue 3

Manufacturers' Inventories, Sales Expectations, and the Acceleration Principle<293:MISEAT>2.0.CO;2-J
p. 293-314

Michael Lovell

The response of manufacturers' inventory holdings to changes in the volume of sales and the backlog of unfilled orders is examined on a quarterly basis for the period 1948-55 within a buffer-stock flexible accelerator framework. The hypothesis that manufacturers successfully hedge against increases in the price of purchased materials, enlarging their stocks in advance of actual price increases, is rejected. By introducing explicitly the impact of prediction errors it is possible to infer that manufacturers tend to underestimate actual changes in sales volume, but by a surprisingly small amount. An analysis of discrepancies between desired and actual inventory holdings reveals that manufacturers tolerated sizable deficiencies in stocks throughout the Korean conflict.

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