The inventory investment equation: an empirical work using business survey data

The most widely used model in empirical work on inventory investment has been the one that combines the accelerator motive with a target adjustment mechanism. However, the rationale for this type of relations remains normally quite vague. In this paper a small theoretical model of inventory investment, developed with solid micro-economic foundations, is presented and estimated using Portuguese and Belgian business survey data. The model can help explaining some concepts that are frequently confused in empirical work and can also rationalize some of the most popular beliefs about inventory behaviour.