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"The Production Smoothing Model is Alive and Well," Journal of Monetary Economics, 1989.

Paper: pdf file

Monthly data in physical units for seven industries are used to examine the production-smoothing hypothesis. The results strongly support this hypothesis. Significant effects of expected future sales on current production are found for four industries, and the estimated decision equations for all seven industries imply production-smoothing behavior. The previous negative results appear to be due to the use of data biased against the hypothesis---the shipments and inventory data of the Department of Commerce. The paper also shows that sensible results can be obtained from estimating approximations to decision equations as opposed to estimating Euler equations.

This work is an extension of 1971#1 and is based on physical units data. Some of the data were originally collected for my Ph.D. thesis and are presented in the appendix in 1969#1. The results in this paper strongly support the production smoothing hypothesis and the hypothesis that expectations of future sales affect current production decisions.