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

Authors: Danziger L.1; Kreiner C.T.1

Source: Economica, Volume 69, Number 275, August 2002 , pp. 433-444(12)

Publisher: Blackwell Publishing

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Abstract:

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.

Language: English

Document Type: Research article

Affiliations: 1: York University and University of Copenhagen, EPRU

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