Disequilibrium Dynamics: An Empirical Study

Abstract

Despite amount of attention devoted in economics to study of equilibria, process by which an equilibrium can be attained is not well understood; Stephen Smale (1977) called this the fundamental problem of economic theory. This paper explores microeconomics of adjustment process by examining empirically disequilibrium behavior of firms. Implications for microeconomic foundations of macroeconomics are stressed. The data, from German industry, describe month-by-month price and output changes of individual firms, as well as firms' own assessments of levels of their inventories and unfilled orders. Because data are qualitative, use is made of multivariate conditional logit model developed by Marc Nerlove and S. James Press (1973, 1976) and extended by Kawasaki and Zimmermann. Section I discusses underlying model of firm behavior and significance of inquiry for macroeconomics. In Section II, econometric techniques are briefly described. In Section III, empirical results are summarized, and interpretations of results are offered in Section IV.

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