Menu Costs and Phillips Curves

Michael Golosov and Robert E. Lucas

No 10187, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real menu cost.' We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with the Israeli evidence obtained by Lach and Tsiddon. The model is also used to conduct numerical experiments on the economy's response to credible and incredible disinflations and other shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.

JEL-codes: E0 (search for similar items in EconPapers)
Date: 2003-12
Note: EFG
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Related works:
Working Paper: Menu Costs and Phillips Curves (2004)
Journal Article: Menu Costs and Phillips Curves (2007)
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