Adjustment Costs, Inventories and Output

24 Pages Posted: 17 Sep 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: 2008-01

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.

Suggested Citation

Danziger, Leif, Adjustment Costs, Inventories and Output (2008-01). Scandinavian Journal of Economics, Vol. 110, Issue 3, pp. 519-542, September 2008, Available at SSRN: https://ssrn.com/abstract=1269704 or http://dx.doi.org/10.1111/j.1467-9442.2008.00549.x

Leif Danziger (Contact Author)

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