Inventories, Factor Demand and Capacity Utilization : the Long and Short Run Structure

An ECM is derived from first order conditions of a factor demand model. Decisions on inventory stock and capacity utilization are (endogenously) modelled, by which a large systems of equations results. Within this system the exogeneity of real factor prices as well as sales in tested. The role of inventory stock in the long run, i.e. as a precautionary measure (according to Holt, Modigliani, Muth and Simon (1960) and/or as a production factor (Kydland and Prescott (1982), Christiano (1988) are further investigated by impulse response functions. For French industrial sectors (1970.I-1992.IV) inventory stocks turn out to be both a decision variable as well as a residual. The precautionary measure is not rejected, but a linear-quadratic specification seems not to hold. Further, no strong evidence is found for the inventory stock as a production factor.