PRICE AND OUTPUT ADJUSTMENT IN A MODEL WITH INVENTORIES - ECONOMETRICEVIDENCE 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, u sing the qualitative information contained in business surveys of U.K. firms. The discussion is organized around a model based on the assump tion of monopolistic competition and which permits a production smooth ing role for inventories. The econometric results suggest that the sto ck of inventories has no impact on output decisions. The effect on pri cing decisions is weak at best. Anticipated demands shocks are the mai n factor accounting for output changes, while both cost and demand sho cks are important determinants of prices.