ON INFLATION AND REAL PRICE VARIABILITY

This paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation. For constant‐elasticity demand and cost of production it is shown that a higher demand, a lower cost of production, or a lower cost of price adjustment leads to less intertemporal variability of real prices. If the marginal cost of production does not increase “too” fast, then the average real price is less than the real price that would prevail in the absence of inflation; additionally, a higher demand, a lower cost of production, or a lower cost of price adjustment leads to a higher level of real prices.