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The Roles of Price Points and Menu Costs in Price Rigidity

Edward Knotek ()

No 201923, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for approximately two-thirds of prices; and (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time. I construct a model that nests roles for menu costs and price points and estimate model variants. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics.

Keywords: price rigidity; price points; menu costs; nine-ending prices (search for similar items in EconPapers)
JEL-codes: C15 D40 E31 L11 M31 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-11-12
New Economics Papers: this item is included in nep-mac
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https://doi.org/10.26509/frbc-wp-201923 Full text (text/html)

Related works:
Working Paper: The Roles of Price Points and Menu Costs in Price Rigidity (2016) Downloads
Working Paper: The roles of price points and menu costs in price rigidity (2010) Downloads
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DOI: 10.26509/frbc-wp-201923

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