Menu Costs and Asymmetric Price Adjustment

Tore Ellingsen, John Hassler and Richard Friberg

No 5749, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The associated kink in the steady state short-run Phillips curve implies that the output loss associated with a small negative inflation surprise is about twice as large as the output gain associated with a small positive inflation surprise.

Keywords: Asymmetric price adjustment; Downward rigidity; Menu costs; Phillips curve (search for similar items in EconPapers)
JEL-codes: D42 E31 E32 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (18)

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