Modified Version: Buffer Role of Inventories and Unfilled Orders

Abstract

According to the firm level model, goods demand y^d acts as a potential constraint on output and — if smaller than ${{\tilde{y}}^{s}}$ — spills over onto labor demand. Such immediate rationing and spillover effects, captured in the aggregate model by the P_G-terms, may seem somewhat unrealistic in a quarterly model because firms should be expected to smooth production in relation to current demand, using output inventories and unfilled orders as buffer stocks. It has been argued, e.g. by Blinder (1980, 1981), that this kind of behavior calls in question the min-condition: output y can be temporarily larger than current demand y^d, and y < y^d does not necessarily mean that demand gets rationed.