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"The Production Smoothing Model is Alive and Well,"
Journal of Monetary Economics, November 1989, 353-370.
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.