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Adjustment Costs, Inventories and Output

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  • Leif Danziger

Abstract

This paper analyzes the optimal adjustment strategy of an inventory-holding firm facing price- and quantity-adjustment costs in an inflationary environment. The model nests both the original menu-cost model that allows production to be costlessly adjusted, and the later model that includes price- and quantity-adjustment costs, but rules out inventory holdings. It is shown that the firm’s optimal adjustment strategy may involve stockouts. At low inflation rates, output is inversely related to the inflation rate, and the length of time demand is satisfied increases with the demand elasticity but decreases with the storage cost and the real interest rate.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2244.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2244

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Keywords: menu costs; quantity-adjustment costs; inventories; stockouts; output; inflation;

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References

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Cited by:
  1. Niels Framroze Møller, 2013. "Understanding Unemployment Hysteresis: A system-based econometric approach to changing equilibria and slow adjustment," Discussion Papers, University of Copenhagen. Department of Economics 13-06, University of Copenhagen. Department of Economics.

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