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Adapting Prices or Quantities in the Presence of Adjustment Costs?

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  • Andersen, Torben M
  • Toulemonde, Eric

Abstract

It is often hypothesized that costs of adjusting both price and quantities may have important implications for the macroeconomic adjustment process, not least to nominal shocks. We analyse this in an explicit intertemporal general equilibrium model considering the empirically relevant case of fixed costs of adjusting prices and fixed and variable costs of adjusting quantities. We find that the presence of both price and quantity adjustment costs changes the response to shocks significantly. It is an implication that "small" shocks do not support the "menu-cost case" but rather both fixed prices and quantities (rationing). A numerical analysis based on available evidence on adjustment costs is used to illustrate the likelihood that the various adjustment patterns actually arise.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 36 (2004)
Issue (Month): 2 (April)
Pages: 177-96

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Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:2:p:177-96

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Young, Andrew & Levy, Daniel, 2013. "Explicit Evidence of an Implicit Contract," MPRA Paper 49174, University Library of Munich, Germany.
  2. Leif Danziger, 2008. "Adjustment Costs, Inventories and Output," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 519-542, 09.
  3. Leif Danziger, 2005. "Output Effects of Inflation with Fixed Price- and Quantity-Adjustment Costs," CESifo Working Paper Series 1538, CESifo Group Munich.
  4. Montornès, J. & Sauner-Leroy, J-B., 2010. "Wage-setting Behavior in France: Additional Evidence from an Ad-hoc Survey," Working papers 282, Banque de France.
  5. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2007. "Non-price rigidity and cost of adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 817-832.

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