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

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  • Erwan Gautier
  • Herve Le Bihan

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.

Suggested Citation

  • Erwan Gautier & Herve Le Bihan, 2022. "Shocks versus Menu Costs: Patterns of Price Rigidity in an Estimated Multisector Menu-Cost Model," The Review of Economics and Statistics, MIT Press, vol. 104(4), pages 668-685, October.
    • Handle: RePEc:tpr:restat:v:104:y:2022:i:4:p:668-685
    DOI: 10.1162/rest_a_00968
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    Cited by:

    1. Nicolas Albacete & Isabel Gerstner & Niklas Geyer & Peter Lindner & Nicolas Prinz & Verena Woharcik, 2022. "Effects of interest rate and inflation shocks on household vulnerability in Austria: a microsimulation using HFCS data," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 44, pages 69-77.
    2. Gautier, Erwan & Karadi, Peter & Conflitti, Cristina & Fabo, Brian & Fadejeva, Ludmila & Fuss, Catherine & Kosma, Theodora & Jouvanceau, Valentin & Martins, Fernando & Menz, Jan-Oliver & Messner, Tere, 2023. "Price adjustment in the euro area in the low-inflation period: evidence from consumer and producer micro price data," Occasional Paper Series 319, European Central Bank.
    3. Gasteiger, Emanuel & Grimaud, Alex, 2023. "Price setting frequency and the Phillips curve," European Economic Review, Elsevier, vol. 158(C).
    4. Dedola, Luca & Gautier, Erwan & Nakov, Anton & Santoro, Sergio & De Veirman, Emmanuel & Henkel, Lukas & Fagandini, Bruno, 2023. "Some implications of micro price-setting evidence for inflation dynamics and monetary transmission," Occasional Paper Series 321, European Central Bank.

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