On the Output-Inflation Relationship When Price and Quantity Adjustments are Costly
14 Pages Posted: 21 Mar 2001
Date Written: May 2000
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.
Keywords: Output-inflation relationship, menu costs, quantity-adjustment costs
JEL Classification: E31
Suggested Citation: Suggested Citation