Menu Costs, Aggregate Fluctuations, and Large Shocks

Adam Reiff and Peter Karadi

No 10138, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How do frictions in price setting influence monetary non-neutrality? We revisit this classic question in a quantitative menu cost model with multi-product firms that face idiosyncratic shocks with unsynchronized stochastic volatility. The model matches the unconditional distribution of price changes and successfully predicts new evidence on pricing responses to large value-added tax shocks. In particular, it captures both the exploding fraction of price changes and the shape of their conditional distribution, outperforming alternative models. The model generates near money neutrality even to small nominal shocks.

Keywords: Monetary policy transmission; Price change distribution; State-dependent pricing; Value-added tax (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Menu Costs, Aggregate Fluctuations, and Large Shocks (2019)
Working Paper: Menu Costs, Aggregate Fluctuations and Large Shocks (2014)
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