Evidence on the Link between Firm-Level and Aggregate Inventory Behavior

This paper describes the finished goods inventory behavior of more than 700 U.S. manufacturing firms between 1985-93 using a new Census Bureau longitudinal data base. Three key results emerge. First, there is a broad mix of production-smoothing and production-bunching firms, with about two-fifths smoothing production. Second, firm-level inventory adjustment speeds are about an order of magnitude larger than aggregate adjustment speeds due to econometric aggregation bias. Finally, accounting for time variation in the inventory adjustment speed due to fluctuations in firm size improves the fit of a traditional aggregate inventory model by one-fifth