Price adjustment costs, anticipated inflation, and output

Abstract

Even when inflation is perfectly predictable, a firm for whici price adjustment is costly will keep its nominal price unchanged for extended periods. At least part of the time, therefore, the firm's real price will diverge from the price that maximizes its instan- taneous profits. In the interval between adjustments, the firm's real price will start out above the profit-maximizing price and eventually fall below this as the general price level rises. An implication is that the firm's actual output will fall short of the profit-maximizing level during the initial stages of an adjustment interval and exceed it during the later stages. At this level of generality it is not clear whetherEven when inflation is perfectly predictable, a firm for whici price adjustment is costly will keep its nominal price unchanged for extended periods. At least part of the time, therefore, the firm's real price will diverge from the price that maximizes its instan- taneous profits. In the interval between adjustments, the firm's real price will start out above the profit-maximizing price and eventually fall below this as the general price level rises. An implication is that the firm's actual output will fall short of the profit-maximizing level during the initial stages of an adjustment interval and exceed it during the later stages. At this level of generality it is not clear whether...