Inventory Dynamics in a Simple Disequilibrium Macroeconomic Model

A simple piecewise linear macroeconomic model with buffer stock inventories is formulated and analyzed in this paper. Buffer stocks partly eliminate rationing of the demand for goods, since rationing appears only when a stock-out is possible. This means that the region of classical unemployment necessarily shrinks and will even disappear when buffer stocks absorb all the randomness of the aggregate demand for goods. 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 depend heavily on the nature of wage and price adjustments.