Inventory growth cycles with debt-financed investment

TL;DR

This paper develops a continuous-time stock-flow consistent model to analyze inventory growth cycles driven by debt-financed investment, capturing short-term Kitchin cycles and long-term demand-driven dynamics.

Contribution

It introduces a novel five-dimensional dynamical system integrating inventory, debt, and demand dynamics, extending existing models with a continuous-time framework.

Findings

Long-run dynamics resemble the Keen model with demand and inventories.

Short-run dynamics exhibit Kitchin-like inventory cycles.

Model captures interactions between debt, inventories, and economic fluctuations.

Abstract

We propose a continuous-time stock-flow consistent model for inventory dynamics in an economy with firms, banks, and households. On the supply side, firms decide on production based on adaptive expectations for sales demand and a desired level of inventories. On the demand side, investment is determined as a function of utilization and profitability and can be financed by debt, whereas consumption is independently determined as a function of income and wealth. Prices adjust sluggishly to both changes in labour costs and inventory. Disequilibrium between expected sales and demand is absorbed by unplanned changes in inventory. This results in a five-dimensional dynamical system for wage share, employment rate, private debt ratio, expected sales, and capacity utilization. We analyze two limiting cases: the long-run dynamics provides a version of the Keen model with effective demand and varying inventories, whereas the short-run dynamics gives rise to behaviour that we interpret as Kitchin cycles.