Explanatory and Forecasting Models of Inventory Investment in Britain.

Inventory investment is the most volatile component of aggregate demand. Its central role in business cycles has been extensively explored since the early 1950's[1] in the United States, yet for Britain only one macroeconomic study of inventory investment has been published.[2] The aim of this paper is to test some explanatory models of the inventory investment decision and to compare their forecasting performance with other forecasting instruments.
Section 2 develops theoretical models incorporating variables which represent various motivations for stockbuilding and constraints, including policy-determined constraints, on investors' behavior. It is hypothesized that the investment function differs between upswings and downswings due to cyclical variations in investors' behavior and in the impact of unplanned accumulation or depletion.
Section 3 estimates the equations from section 2, and section 4 uses some of the estimated equations to derive forecasts for the post-sample period 1967 II to 1968 IV. Their forecasting performance is compared with that of forecasts from a non-explanatory autoregressive scheme, the National Institute and the econometric equations of several U.S. studies.
Attention is limited to investment in stocks of finished goods by British manufacturers. [ABSTRACT FROM AUTHOR]