Disequilibrium Dynamics with Inventories and Anticipatory Price-Setting

Abstract

This paper studies the sequence of short-run quantity-constrained equilibria of a model with a single storable output, labor and money. The durability of output gives rise to inventory fluctuations which influence the course of the equilibria attained. One special feature of interest is the assumption that prices are not at the level which would equilibrate all markets if there were no stochastic shocks to the economy. With prices frozen at this level, the nature of the realized shocks determines the type of disequilibrium realized and the unintended component of inventory change. The analysis concentrates on two questions: What is the statistical nature of the process governing the real wage, output, employment and inventories? And is it possible to test this model against the alternative hypothesis that prices are continually flexible even after the shocks have disturbed the system? We find that although these theories are similar in their qualitative structure, tests can be developed. We also show how the frequencies of different types of quantity-constrained equilibria vary with the stochastic specification. This may shed some insight on why it is commonly believed that some types of disequilibrium phenomena have not been observed.