Production Smoothing, Inventory Investment and Asymmetric Adjustment

There is now a plethora of non-linear time-series models of output over the business cycle, and considerable empirical evidence that there are key non-linear, poorly understood mechanisms at work. Inventories, though a small part of the total flow of national income, play a disproportionately large role in fluctuations in output. It would seem natural to try to determine what role inventories play in the non-linear behaviour of the business cycle. The first question to ask is, are there economic models of firm behaviour that would suggest that the movement of inventories over the business cycle is non-linear? The second issue is whether we can detect such non-linearity in the data. In this paper, data are used on the inventories behaviour of UK manufacturing, disaggregated according to the stage of fabrication. It is found that the asymmetric adjustment of inventories varies with the stage of fabrication.