Kiel Working Papers, Kiel Institute for World Economics
No 1340:
Adjustment Costs, Inventories and Output
Leif Danziger
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. 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 decreases with the absolute value of
the demand elasticity, the storage cost, and the real interest rate.
Keywords: Menu costs; Quantity-adjustment costs; Inventories; Output; Inflation; (follow links to similar papers)
JEL-Codes: D21; D24; L23; (follow links to similar papers)
23 pages, June 2007
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