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On the Inventory Cycle and the Instability of the Competitive Mechanism

Guy Laroque
Econometrica
Vol. 57, No. 4 (Jul., 1989), pp. 911-935
Published by: The Econometric Society
DOI: 10.2307/1913777
Stable URL: http://www.jstor.org/stable/1913777
Page Count: 25
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
On the Inventory Cycle and the Instability of the Competitive Mechanism
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Abstract

This paper presents a model of the business cycle with perfect foresight where the mere presence of inventories is responsible for the appearance of the cycle. The basic assumption of the model is that the price system does not adjust instantaneously to its competitive value. Then inventory holding destabilizes the tâtonnement dynamics and creates the cycle. A Wicksellian cumulative process generates both the booms, where the real rate of return on cash is smaller than the natural rate of interest obtained by the inventory holders, and the recessions, where inventories are dominated by money balances.

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