PRICE AND OUTPUT ADJUSTMENT IN A MODEL WITH INVENTORIES - ECONOMETRIC EVIDENCE FROM CATEGORICAL SURVEY DATA

In this paper we investigate the role of inventories in the adjustment process of prices and output in response to demand and cost shocks, using the qualitative information contained in business surveys of U.K. firms. The discussion is organized around a model based on the assumption of monopolistic competition and which permits a production smoothing role for inventories. The econometric results suggest that the stock of inventories has no impact on output decisions. The effect on pricing decisions is weak at best. Anticipated demands shocks are the main factor accounting for output changes, while both cost and demand shocks are important determinants of prices.