Menu costs and information rigidity: Evidence from the consumption tax hike in Japan
Journal of Macroeconomics, 2022, vol. 72, issue C
Pre-announced consumption tax changes can provide an opportunity for firms to reset their prices, which potentially leads to an economic stimulus. To test this argument, I examine firms’ price-setting behavior in response to Japan’s consumption tax hike in 2014. I find that prices became less sticky after the tax hike, suggesting that firms paid menu costs when passing through the tax hike to their prices. Nonetheless, I find that more than half of prices remained constant on a tax-excluded basis after the tax hike. This finding suggests that another factor prevented firms from adjusting their prices, though they paid menu costs.
Keywords: Price stickiness; Tax-included and tax-excluded prices; Consumption tax pass-through; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E62 H32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:72:y:2022:i:c:s0164070422000040
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