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Inventories, Markups, and Real Rigidities in Menu Cost Models

  • Oleksiy Kryvtsov
  • Virgiliu Midrigan

A growing consensus in New Keynesian macroeconomics is that nominal cost rigidities, rather than countercyclical markups, account for the bulk of the real effects of monetary policy shocks. We revisit these conclusions using theory and data on inventories. We study an economy with nominal rigidities in which goods are storable. Our theory predicts that if costs of production are sticky and markups do not vary much in response to, say, expansionary monetary policy, firms react by excessively accumulating inventories in anticipation of future cost increases. In contrast, if the data inventories are fairly constant over the cycle and in response to changes in monetary policy. We show that costs must increase and markups must decline sufficiently in times of a monetary expansion in order to reduce firm's incentive to hold inventories and thus bring the model's inventory predictions in line with the data. Versions of the model consistent with the dynamics of inventories in the data imply that countercyclical markups account for a sizable fraction of the response of real variables to monetary shocks. Copyright , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rds028
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Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 1 ()
Pages: 249-276

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Handle: RePEc:oup:restud:v:80:y:2013:i:1:p:249-276
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