Output Effects of Inflation with Fixed Price- and Quantity-Adjustment Costs
17 Pages Posted: 24 Oct 2005
Date Written: September 2005
With fixed costs of price and quantity adjustment, output effects of inflation depend on the elasticity of the firm's marginal real revenue. If the elasticity always exceeds minus unity, then output decreases with inflation, while if the elasticity is always less than minus unity, then output increases with inflation. In the special case that the elasticity always equals minus unity, then output is independent of inflation. This is the case if demand is derived from a logquadratic utility function.
JEL Classification: E31
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