Inflation, Output and Labour Productivity When Prices are Changed Infrequently

When prices are changed infrequently, the effect of inflation on output depends on the form of profit and demand functions. This paper provides a general taxonomy. At small inflation rates, output falls (rises; stays the same) if the demand function is concave (convex; linear) in terms of the log of real price. This holds when the frequency of price changes is fixed (in case of a catalogue firm) as well as when it is chosen optimally (in case of a menu cost firm), with fixed and variable price adjustments costs. With some specifications, inflation increases output, but reduces labor productivity. Copyright 1990 by The London School of Economics and Political Science.