BUFFER STOCKS, AGGREGATE ACTIVITY, AND ECONOMIC POLICY

The buffer motive for holding inventories would lead us to expect that at any point in time inventory stocks might deviate from their long-run desired level. These undesired inventory stocks will have subsequent effects upon output. This paper shows that if we fail to include a measure of the deviation of stocks from desired levels in a study of the effect of monetary and fiscal policy, we will attribute variability to the effect of policy that is not the result of the policies themselves.