No. 218 - Actual and "Normal" Inventories of Finished Goods: Qualitative and Quantitative Evidence from the Italian Manufacturing Sector
Anecdotal evidence concerning the last decade points to increased flexibility of the production process in Italian manufacturing. We consider its impact on inventory levels and accumulation, taking also account of the higher real interest rates prevailing during the eighties.
In the absence of direct measures for the inventories of finished goods held by manufacturers, we use a qualitative indicator, derived from monthly surveys, that reflects the divergence between actual and "normal" inventories, a proxy of the intended investment in inventories. We estimate a process for this indicator, finding a significant impact of real interest rates and demand. Consistently with the increased flexibility of the production process, we find that during the last decade the intended change in inventories was more geared to the current level of demand than to short-term expectations.
We also obtain an estimate of the actual level of inventories, which shows a gentle downward trend as a ratio to current sales. Estimating the process of inventory accumulation, we find that the traditional production-smoothing model remains a suitable reference point; the disequilibrium signalled by firms has a significant effect on their actual investment.
This paper has been written for Economic, Econometrics and the LINK; Essays in Honor of Lawrence R. Klein, edited by M. J. Dutta et al., Elsevier.
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