Ergodic chaos in inventory oscillations: An example

Abstract

This study reveals the dynamic structure of a nonlinear Metzlerian inventory cycle model that can generate complex dynamics. As a first step, it focuses on how the rational behavior of the supply side is responsible for the emergence of complex inventory fluctuations. To this end, the supply side is constructed on the basis of intertemporal optimization representing the short-run profit maximizing behavior of a firm. On the other hand, the demand side is constructed to be as simple as possible (i.e. the linear expenditure function). The firm is assumed to have a piecewisely flexible inventory-expected sales ratio. The resultant inventory adjustment system becomes piecewise-linear. This study demonstrates that the inventory accumulation may follow a wide range of complex dynamics including stable cycles, window phenomenon and ergodic chaos. It also shows that various types of dynamic behavior depend on the relationship between the marginal propensity to consume and marginal propensity to invest. Thus it can be concluded that the source of such a wide spectrum of complex inventory dynamics is an interaction between demand and supply.