The Curse of Flexibility Under Uncertainty
Engin Kara
No 12166, CESifo Working Paper Series from CESifo
Abstract:
How firms respond to uncertainty determines economic policy effectiveness. Using Brexit as a natural experiment, I document that flexible price-setters—those most responsive to monetary policy—paradoxically reduce adjustment more than sticky firms under uncertainty. This ‘curse of flexibility’ reverses menu cost models’ foundational prediction that flexibility amplifies responses. Under uncertainty, resetting prices exposes firms to symmetric shocks, while maintaining current prices provides partial insulation. Flexible-price firms can afford to exploit this differential exposure by waiting; sticky-price firms cannot. This creates a policy challenge: uncertainty weakens monetary transmission when needed most, as flexible firms—the most responsive channel—become more cautious during crises.
Keywords: menu costs; price stickiness; uncertainty; state-dependent pricing; heterogeneous firms; monetary policy transmission (search for similar items in EconPapers)
JEL-codes: D21 D83 E31 E52 L11 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-mon
References: Add references at CitEc
Citations:
Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12166.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12166
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().