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Accounting for output fluctuations in manufacturing

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Abstract:

There is a substantial body of evidence to the effect that output is more volatile than sales among manufacturing industries. Numerous explanations have been advanced to account for this excess output volatility. Some examples are pro-cyclical inventory movements induced by a stockout-avoidance motive, cost and technology shocks and decreasing marginal costs. This article assesses the contribution of these different motives to output volatility for six different manufacturing industries. Linear-quadratic models are estimated for each of the industries and then dynamic simulations are employed to determine the volatility of output when one or more of the factors are removed from the model. Technology shocks provide the most significant contribution to output volatility. The stockout-avoidance motive is also important. Cost shocks provide a very small contribution and marginal production costs are increasing at the margin and thus stabilize output. It is also shown that output volatility declines when current values of sales and material costs are assumed known rather than forecasted from prior periods' values.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701222538

Affiliations: 1: Department of Economics, Indiana University - Purdue University Indianapolis (IUPUI), Indianapolis, IN 46202, USA 2: Department of Economics, University of Alberta, Canada

Publication date: August 1, 2009

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