TY  - JOUR
AU  - Blinder,Alan S.
TI  - Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 620
PY  - 1983
Y2  - 1983
UR  - http://www.nber.org/papers/w0620
L1  - http://www.nber.org/papers/w0620.pdf
N1  - Author contact info:
Alan S. Blinder
Department of Economics
Princeton University
Princeton, NJ 08544-1021
Tel: 609/258-3358
Fax: 609/258-5398
E-Mail: blinder@princeton.edu
AB  - The role of inventories in making prices "sticky" is studied by analyzing a dynamic linear-quadratic model of a monopoly firm facing stochastic demand, but able to store its finished goods in inventory. It is shown that, in contrast to the usual presumption, firms that exhibit the smallest output responses to demand fluctuations may also exhibit the smallest price fluctuations. Specifically, firms which have very flexible inventory storage facilities or are subjected to very transitory demand shocks will rely on inventories as buffers, and will change neither production nor price very much. On the other hand, firms which have very inflexible storage facilities or whose demand shocks are quite permanent will display large swings in both price and output. The standard assumption about inventory carrying costs that has been used in the literature (that they are linear) is shown to imply that production is impervious to fluctuations in demand. It is also established that prices may respond more strongly to positive demand shocks than to negative ones if it is impossible to hold negative inventories (i.e., to have unfilled orders). The model offers an explanation for "stickiness" in relative prices. However, under certain circumstances, it may help explain the persistence of inflation
ER  -