Inventory Dynamics in a Simple Disequilibrium Macroeconomic Model

Abstract

The paper formulates and analyzes a simple piecewise linear macroeconomic model with buffer stock inventories. Buffer stocks partly eliminate the rationing of the demand for goods, since rationing appears only when a stock-out in possible. This means that the region of Classical Unemployment necessarily shrinks, and it even disappears when buffer stocks absorb all the randomness of aggregate demand for goods. The inventory dynamics with constant wages and prices have steady states either in the region of Keynesian Unemployment or Repressed Inflation. In the former case the motion is oscillatory and either converges or ends in a limit cycle, while in the latter it is monotonic. Some of the complications caused by flexible wages and prices are sketched but the results are heavily dependent on the nature of wage and price adjustments.