A Re-interpretation of the Linear-Quadratic Model When Inventories and Sales are Polynomially Cointegrated

Anindya Banerjee and Paul Mizen

No ECO2003/11, Economics Working Papers from European University Institute

Abstract: Estimation of the linear quadratic model, the workhorse of the inventory literature, traditionally takes inventories and sales to be first-difference stationary series, and the ratio of the two to be stationary. However, these assumptions do not match the properties of the data for the last two decades in the US and the UK. We offer a model that allows for the non-stationary characteristics of the data, using polynomial cointegration. We show that the closed-form solution has other recent models as special cases. The resulting model performs well and shows good forecasting properties.

Keywords: cointegration; linear quadratic; inventories (search for similar items in EconPapers)
JEL-codes: C32 C61 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A re-interpretation of the linear quadratic model when inventories and sales are polynomially cointegrated (2006)
Journal Article: A re‐interpretation of the linear quadratic model when inventories and sales are polynomially cointegrated (2006)
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