(S,s) inventories, state-dependent prices and the propagation of nominal shocks

The typical shape of our model's two-dimensional hazard and its changes over time necessarily depend upon the distributions of menu costs and fixed order costs. We calibrate these distributions using firm-level pricing data (as used by Midrigan (2006)) alongside aggregate data on inventories, sales and production from the NIPA (as used by Khan and Thomas (2007)). We solve the model using an analytical characterization of firms' binary decisions on price and/or inventory adjustment together with a numerical approach similar to that implemented in Khan and Thomas (2007).