Journal Article

Inventories, Markups, and Real Rigidities in Menu Cost Models

Oleksiy Kryvtsov and Virgiliu Midrigan

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 1, pages 249-276
Published in print January 2013 | ISSN: 0034-6527
Published online July 2012 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rds028
Inventories, Markups, and Real Rigidities in Menu Cost Models

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A growing consensus in New Keynesian macroeconomics is that nominal cost rigidities, rather than countercyclical markups, account for the bulk of the real effects of monetary policy shocks. We revisit these conclusions using theory and data on inventories. We study an economy with nominal rigidities in which goods are storable. Our theory predicts that if costs of production are sticky and markups do not vary much in response to, say, expansionary monetary policy, firms react by excessively accumulating inventories in anticipation of future cost increases. In contrast, if the data inventories are fairly constant over the cycle and in response to changes in monetary policy. We show that costs must increase and markups must decline sufficiently in times of a monetary expansion in order to reduce firm's incentive to hold inventories and thus bring the model's inventory predictions in line with the data. Versions of the model consistent with the dynamics of inventories in the data imply that countercyclical markups account for a sizable fraction of the response of real variables to monetary shocks.

Keywords: Inventories; markups; costs; JEL Codes; E31; F12

Journal Article.  12336 words.  Illustrated.

Subjects: Economics

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