Inventories, Markups, and Real Rigidities in Menu Cost Models

We examine the general equilibrium implications of an Aguirregabiria (1999) - type economy, in which firms are subject to fixed cost of price- and inventory-adjustment that is capable of generating infrequent orders and price changes observed in the data. We ask whether the model can account for patterns of temporal price variation, frequency of stockouts, etc. in the micro data and study the response of real activity to monetary disturbances in an otherwise standard (S,s) setup.