TY  - JOUR
AU  - Kryvtsov,Oleksiy
AU  - Midrigan,Virgiliu
TI  - Inventories, Markups, and Real Rigidities in Menu Cost Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14651
PY  - 2009
Y2  - January 2009
UR  - http://www.nber.org/papers/w14651
L1  - http://www.nber.org/papers/w14651.pdf
N1  - Author contact info:
Oleksiy Kryvtsov
Bank of Canada
Research Department
234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
Tel: (613) 782-7818
Fax: (613) 782-7163
E-Mail: okryvtsov@bankofcanada.ca

Virgiliu Midrigan
Department of Economics
New York University
19 W. 4th St.
New York, NY 10012
Tel: 212/992-8081
Fax: 212/995-4186
E-Mail: virgiliu.midrigan@nyu.edu
AB  - Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available. We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs. We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-to-sales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio.
ER  -