Production Delays and Price Dynamics

This paper develops a unified analysis of the impacts of production delays on aggregate price fluctuations in a continuous-time cobweb-type model. We find that the time inconsistency between demand and supply due to production delays inherently generates an overshooting effect in prices. Large production delays give rise to price fluctuations, even with a low intensity of choice. In our model, investor beliefs (prices) are updated slowly (quickly), leading prices to build up slowly but crash suddenly. We also provide results consistent with the rational route to randomness of Brock and Hommes (1997) in a continuous-time infinite-dimensional economy