Buffers or Amplifiers? Microeconomic Evidence on the Role of Inventories in Peruvian Production

This paper tests the production smoothing hypothesis, which posits that inventories serve to buffer demand shocks. Using quarterly firm-level balance sheet data reported to the Peruvian Superintendency of Securities Market, we construct measures of inventories, sales, and production. We find that production exhibits greater volatility than sales and that inventories behave procyclically, results that challenge the view of inventories as a stabilizing mechanism. Motivated by these stylized facts, we estimate a partial adjustment inventory function using panel data, grounded in (S, s) inventory accumulation models. The results point to a nonlinear and asymmetric adjustment process: firms correct inventory shortages more rapidly than excess holdings relative to their target levels, highlighting the relevance of stockout costs. Furthermore, the speed of adjustment intensifies during recessions, reinforcing the procyclical behavior of inventories and suggesting that they may act as an amplifier of business cycle fluctuations.