Nonlinear Inflation Dynamics in Menu Cost Economies

Andres Blanco, Corina Boar (), Callum Jones and Virgiliu Midrigan

No 10, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve.

Keywords: menu costs; inflation; Phillips curve (search for similar items in EconPapers)
JEL-codes: E12 E31 E32 E52 (search for similar items in EconPapers)
Pages: 71
Date: 2024-09-23
New Economics Papers: this item is included in nep-mon
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Published in 2024

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Working Paper: Nonlinear Inflation Dynamics in Menu Cost Economies (2024)
Working Paper: Non-Linear Inflation Dynamics in Menu Cost Economies (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:99190

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DOI: 10.29338/wp2024-10

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