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Buffer Stocks, Sales Expectations, and Stability: A Multi-Sector Analysis of the Inventory Cycle

Michael C. Lovell

Abstract

A multi-sector buffer-stock inventory model is developed in an attempt to resolve the problem of aggregation involved in deriving implications for the stability of the economy from a consideration of inventory practices of individual firms. It is demonstrated that stability depends upon a multitude of parameters, some of which are suppressed in aggregative model construction. The economy is necessarily unstable when perfect, if myopic expectations are assumed. With naive expectations stability becomes a definite possibility, particularly if firms attempt only a delayed adjustment of inventories to the equilibrium level. Although the empirical evidence marshaled in order to illustrate the application of the theorems does not prove sufficiently accurate to permit precise conclusions, it is apparent that the conditions for stability may well be satisfied for reasonable values of the system's parameters. Tax schemes which have been suggested as means of stabilizing fluctuations in inventory investment are appraised in the concluding section.