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On the Output-Inflation Relationship when Price and Quantity Adjustments are Costly

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Abstract

A vast literature analyzes the real effects of price-adjustment costs assuming that quantity adjustments are costless. In this paper, we analyze whether the presence of quantity-adjustments costs, which presumably are significant, change the traditional results on the impact of inflation. In particular, recent findings suggest that quantity-adjustment costs may remove the linkage between output and inflation. We show that this is not the case when inflation is anticipated. On the contrary, quantity-adjustment costs may significantly amplify the consequences of price-adjustment costs. Une vaste littérature analyse les effets réels de coûts d'ajustement des prix en supposant que les ajustements de quantités sont sans coûts. Dans ce papier, nous analysons si la présence de coûts d'ajustement des quantités, qui sont probablement significatifs, change le résultat traditionnel sur l'impact de l'inflation. En particulier, des résultats récents suggèrent que les coûts d'ajustement des quantités peuvent supprimer le lien entre inflation et production. Nous montrons que cela n'est pas le cas lorsque l'inflation est anticipée. Au contraire, les coûts d'ajustement des quantités peuvent amplifier significativement les conséquences des coûts d'ajustement des prix.

Suggested Citation

  • Leif Danziger & Claus Thustrup Hansen, 2000. "On the Output-Inflation Relationship when Price and Quantity Adjustments are Costly," Cahiers de recherche CREFE / CREFE Working Papers 116, CREFE, Université du Québec à Montréal.
    • Handle: RePEc:cre:crefwp:116
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    References listed on IDEAS

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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