Perceived and expected quantity constraints in inventory dynamics

Abstract Inventory dynamics play a significant role in business cycles, as inventory tends to be more sensitive to excess demand fluctuations than it is to production. This study addresses the decision-making problem of firms and households under possible quantity-constrained trade using a simple model based on Keynesian unemployment in disequilib-rium economics. In the presented model, production and consumption are determined by the firm and household, respectively. In particular , they solve intertemporal optimizations under expected future constraints that depend on current states such as sales and income. Their independent decisions cause disequilibrium in goods: the gaps between production and sales and between planned and actual trade. While the former gap is buffered by inventory, we use United States data to show that the existence of inventory holdings cannot moderate the disequilibrium. Our simple model contributes to the body of knowledge on this topic as it endogenizes the firm’s objective value of the inventory–sales ratio in Metzlerian dynamics, reproduces the qualitative inventory dynamics, and reveals how stock disequilibrium affects flow disequilibrium dynamics. JEL code:C60, E12, E32