Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints

Almut Balleer, Nikolay Hristov and Dominik Menno

No 11790, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study how credit constraints and the frequency of price adjustment interact. We show that a working capital constraint increases the kurtosis of the price change distribution and generates small and large price changes to co-exist in a menu cost model. Our model is consistent with firm- level evidence for Germany that relates financial constraints to the frequency and direction of price changes. Financial frictions change the propagation of aggregate nominal shocks: The frequency of price adjustments fluctuates and the average price-adjustment size falls weakening the selection effect. Monetary non-neutrality only increases when the overall level of price adjustment falls.

Keywords: Frequency of price adjustment; Financial frictions; Menu cost model (search for similar items in EconPapers)
JEL-codes: E31 E44 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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