Capital and inventory investments under quantity constraints: A microfounded Metzlerian model

Although modern analyses of inventory dynamics identify the implicit roles of inventory holding, they do not entirely address its primary role. This study analyzes the correlation between the current quantity constraints and choices in intertemporal optimizations by modeling inventory dynamics. The economy's quantity constraints are reflected in a representative firm's optimization of its current employment and investment based on the perceived sales constraints. Using analytical and numerical methods, the results show that the Metzlerian cycle of inventory and sales expectations survives under the canonical intertemporal optimization framework, as the stable inventory-to-sales ratio is reproduced. Additionally, this Metzlerian model illustrates the qualitative aspects of inventory dynamics in the business cycle. However, the quantitative aspects are not reproduced through the optimization framework because the firm's control is based on a stationary growth path, thereby weakening the effects of sales expectation dynamics.