A TEST OF THE LINEAR RATIONAL-EXPECTATIONS EQUILIBRIUM INVENTORY MODEL IN THE EEC

In this paper I test an extension of the familiar Holt, Modigliani, Muth, and Simon (1960) inventory model using annual data from the EEC countries. The two-step two-stage least squares estimation technique of Cumby et al. (1983) is used. The model is tested using the Generalized Variance Bounds test developed by Kollintzas (1988) and the Variance Bounds test of West (1986). In the majority of the cases the empirical evidence gives support to the traditional inventory model when allowing for stochastic cost shocks and stock-out avoidance motives.