Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models

Mikael Carlsson

Journal of Money, Credit and Banking, 2017, vol. 49, issue 8, 1803-1830

Abstract: We use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost. This self‐selection of price changes is a key feature in the canonical Menu‐Cost model a la Golosov and Lucas Jr. (2007), which may generate near monetary neutrality (Golosov and Lucas Jr. 2007, Karadi and Reiff 2016), but is absent in the Calvo (1983) model. We find that the microdata strongly favors the Calvo (1983) model. Thus, upstream in the supply chain, price setting is best characterized by a very low degree of self‐selection into price changes.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:49:y:2017:i:8:p:1803-1830

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