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Fixed Production Capacity, Menu Cost and the Output-Inflation Relationship

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  • Danziger, Leif
  • Krainer, Claus Thustrup

Abstract

This paper analyses the impact of inflation when firms face frictions in both price and quantity adjustments. A vast literature examines the consequences of price-adjustment costs assuming frictionless quantity adjustments. However, temporary quantity adjustments may be expensive, for example because continual adjustments of the optimal production plant are impossible. Moreover, recent findings suggest that frictions in quantity adjustment may remove the linkage between output and inflation. In this paper we show that this is not the case when inflation is anticipated. On the contrary, a predetermined production capacity may significantly amplify the consequences of price adjustment costs. Copyright 2002 by The London School of Economics and Political Science

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 69 (2002)
Issue (Month): 275 (August)
Pages: 433-44

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Handle: RePEc:bla:econom:v:69:y:2002:i:275:p:433-44

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Cited by:
  1. Leif Danziger, 2007. "Adjustment Costs, Inventories and Output," Kiel Working Papers 1340, Kiel Institute for the World Economy.
  2. Leif Danziger, 2007. "Output Effects Of Inflation With Fixed Price- And Quantity-Adjustment Costs," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 115-120, 01.
  3. Yunus Aksoy & Hanno Lustig, 2006. "Exchange Rates, Prices and International Trade in a Model of Endogenous Market Structure," Birkbeck Working Papers in Economics and Finance 0609, Birkbeck, Department of Economics, Mathematics & Statistics.
  4. Danziger, Leif, 2003. "Inflation, costly price and quantity adjustments, and time spent in the Keynesian regime," Economics Letters, Elsevier, vol. 80(2), pages 161-166, August.
  5. Leif Danziger, 2001. "Output and Welfare Effects of Inflation with Costly Price and Quantity Adjustments," American Economic Review, American Economic Association, vol. 91(5), pages 1608-1620, December.

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