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Do Menu Costs Make Prices Sticky?

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  • Thomas A. Eife

    ()
    (University of Heidelberg, Department of Economics)

Abstract

This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.

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File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp477.pdf
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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0477.

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Length: 30 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:awi:wpaper:0477

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Keywords: menu costs; price stickiness;

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References

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  1. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Working Paper Series 0652, European Central Bank.
  2. Dhyne, E. & Fuss, C. & Pesaran, H. & Sevestre, P., 2007. "Lumpy Price Adjustments, A Microeconometric Analysis," Cambridge Working Papers in Economics 0719, Faculty of Economics, University of Cambridge.
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  5. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2013. "A Structural Approach to Identifying the Sources of Local Currency Price Stability," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 175-210.
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  12. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  13. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  14. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A framework for identifying the sources of local currency price stability with an empirical application," Staff Reports 287, Federal Reserve Bank of New York.
  15. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  16. Dutta, Shantanu, et al, 1999. "Menu Costs, Posted Prices, and Multiproduct Retailers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 683-703, November.
  17. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
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Cited by:
  1. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers 2006-06, Bank of Estonia, revised 12 Oct 2006.

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