Price Stickiness: Empirical Evidence of the Menu Cost Channel

Eric Anderson (), Nir Jaimovich and Duncan Simester ()
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Eric Anderson: Northwestern University
Duncan Simester: Massachusetts Institute of Technology

The Review of Economics and Statistics, 2015, vol. 97, issue 4, 813-826

Abstract: A leading explanation in the economic literature is that monetary policy has real effects on the economy because firms incur a cost when changing prices. Using a unique database of cost and retail price changes, we find that variation in menu costs results in up to 13.3% fewer price increases. We confirm that these effects are allocative and have a persistent impact on both prices and unit sales. We provide evidence that the menu cost channel operates only when cost increases are small in magnitude, which is consistent with theory and provides the first empirical evidence of boundary conditions.

Keywords: menu costs; price increases; price changes; monetary policy (search for similar items in EconPapers)
JEL-codes: E30 L11 M30 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (61)

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