Sectoral heterogeneities in price rigidity and returns to scale

Mohamed Diaby and Atsuyoshi Morozumi ()

No 2019/05, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: Previous research on price-setting has shown that the degree of nominal price rigidity differs substantially across sectors. This paper proposes returns to scale as a key determinant of this sectoral heterogeneity in price rigidity. We develop a multi-sector menu cost model with heterogeneity in returns to scale and sectoral idiosyncratic shocks, and show analytically that a sector with higher returns to scale is associated with larger price rigidity. Numerical experiments using estimated returns to scale for US manufacturing sectors suggest that the e ect of returns to scale is quantitatively large. We also provide empirical evidence consistent with the theoretical prediction.

Keywords: Menu costs; Sectoral heterogeneity; Price rigidity; Returns to scale (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:19/05

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