COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 896

"The Production Smoothing Model Is Alive and Well"

Ray C. Fair

February 1989

Monthly data in physical units for seven industries are used to examine the production smoothing hypothesis. The results strongly support this hypothesis. Significant effects of expected future sales on current production are found for four industries, and the estimated decision equations for all seven industries imply production smoothing behavior. The previous negative results regarding the hypothesis appear to be due to the use of poor data, particularly the shipments and inventory data of the Department of Commerce.

JE Classification: 131, 522, 514, 631

Keywords: Production smoothing, investment, inventories