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


  • Danziger, Leif
  • Krainer, Claus Thustrup


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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  • Danziger, Leif & Krainer, Claus Thustrup, 2002. "Fixed Production Capacity, Menu Cost and the Output-Inflation Relationship," Economica, London School of Economics and Political Science, vol. 69(275), pages 433-444, August.
  • Handle: RePEc:bla:econom:v:69:y:2002:i:275:p:433-44

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    References listed on IDEAS

    1. Ann P. Bartel & George J. Borjas, 1981. "Wage Growth and Job Turnover: An Empirical Analysis," NBER Chapters,in: Studies in Labor Markets, pages 65-90 National Bureau of Economic Research, Inc.
    2. Jacob Mincer & Boyan Jovanovic, 1981. "Labor Mobility and Wages," NBER Chapters,in: Studies in Labor Markets, pages 21-64 National Bureau of Economic Research, Inc.
    3. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
    4. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-1175, September.
    5. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
    6. Hart,Robert A., 2004. "The Economics of Overtime Working," Cambridge Books, Cambridge University Press, number 9780521801423, March.
    7. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
    8. Paul J. Devereux, 2001. "The Cyclicality of Real Wages within Employer-Employee Matches," ILR Review, Cornell University, ILR School, vol. 54(4), pages 835-850, July.
    9. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
    10. Hart, Robert A & Ruffell, Robin J, 1993. "The Cost of Overtime Hours in British Production Industries," Economica, London School of Economics and Political Science, vol. 60(238), pages 183-201, May.
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    Cited by:

    1. Daniel Levy & Haipeng (Allan) Chen & Georg Müller & Shantanu Dutta & Mark Bergen, 2010. "Holiday Price Rigidity and Cost of Price Adjustment," Economica, London School of Economics and Political Science, vol. 77(305), pages 172-198, January.
    2. 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.
    3. Leif Danziger, 2008. "Adjustment Costs, Inventories and Output," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 519-542, September.
    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. Yunus Aksoy & Hanno Lustig, 2007. "Exchange Rates, Prices And International Trade In A Model Of Endogenous Market Structure," Manchester School, University of Manchester, vol. 75(2), pages 160-192, March.
    6. 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, January.
    7. Ho, Wai-Yip Alex & Yetman, James, 2006. "Shock size, asymmetries, and state dependent pricing," Economics Letters, Elsevier, vol. 90(3), pages 440-445, March.

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