Menu Costs, Aggregate Fluctuations, and Large Shocks

Peter Karadi and Adam Reiff

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 3, 111-46

Abstract: We document that the aggregate price level responds flexibly and asymmetrically to large positive and negative value-added tax changes. We present a price-setting model with menu costs, trend inflation, and fat-tailed product-level shocks that is consistent with these observations. The model predicts a flexible price-level response to standard monetary policy shocks because it anticipates a large number of firms on the verge of price adjustment and far from their optimal prices when the shock hits.

JEL-codes: E31 E32 E52 E62 H25 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20160054
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Citations: View citations in EconPapers (36)

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Related works:
Working Paper: Menu Costs, Aggregate Fluctuations, and Large Shocks (2014)
Working Paper: Menu Costs, Aggregate Fluctuations and Large Shocks (2014)
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