On the output-inflation relationship when price and quantity adjustments are costly

In: CESifo working paper series 293

Abstract

A vast literature analyzes the real effects of price-adjustment costs assuming that quantity adjustments are costless. In this paper the authors 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. The authors 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.