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Vol. 79, No. 4
Posted 1997-07-01

Do Inventories Moderate Fluctuations in Output?

by Donald S. Allen

Inventories are widely believed to serve as a buffer stock against unexpected fluctuations in demand, allowing firms to plan production more efficiently. If so, we would expect production to vary less than sales and inventory to move in the opposite direction to sales. However, research finds that production varies more than sales and that there is a positive correlation between changes in inventory and changes in sales. These findings imply that inventories are not being used to smooth production and do not serve as a buffer for uncertain demand. The author examines firm-level data and finds that firms may use inventories to smooth production, but only partially.

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