Shocks versus Menu Costs: Patterns of Price Rigidity in an Estimated Multisector Menu-Cost Model

Erwan Gautier and Hervé Le Bihan

The Review of Economics and Statistics, 2022, vol. 104, issue 4, 668-685

Abstract: Sectoral heterogeneity matters for monetary policy. Using CPI microdata, we estimate for 227 products a time-varying menu-cost model to investigate the quantitative relevance of this heterogeneity. We find a substantial degree of cross-sectoral heterogeneity in all structural parameters. Heterogeneity in the Calvo component of the pricing friction is, however, the main source of heterogeneity in price rigidity. Cross-sectoral heterogeneity amplifies the output effect of a monetary shock by a factor of about 2.5, compared to a single-sector model estimated with mean moments. Heterogeneity in the Calvo parameter plays a key role in this amplification.

Date: 2022
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