Adjustment Costs, Inventories and Output

32 Pages Posted: 11 Mar 2008

See all articles by Leif Danziger

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2008

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.

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

JEL Classification: D21, D24, L23

Suggested Citation

Danziger, Leif, Adjustment Costs, Inventories and Output (March 2008). CESifo Working Paper Series No. 2244, Available at SSRN: https://ssrn.com/abstract=1104967

Leif Danziger (Contact Author)

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