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Menu Costs and Inflation Asymmetries Some Micro Data Evidence

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  • Peter Karadi

    ()
    (New York University)

  • Adam Reiff

    ()
    (Central Bank of Hungary)

Abstract

The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be explained by the interaction of menu costs, (sectoral) trend inflation and forward-looking firms, thereby it provides direct evidence to the argument of Ball and Mankiw (1994).

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Bibliographic Info

Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0706.

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Length: 34 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:has:discpr:0706

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Keywords: Menu Cost; Inflation Asymmetry; Sectoral Heterogeneity; Value-Added Tax;

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References

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  1. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1241-1289.
  2. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers, Society for Economic Dynamics 144, Society for Economic Dynamics.
  3. Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers 1602, Harvard - Institute of Economic Research.
  4. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers, Federal Reserve Bank of Minneapolis 652, Federal Reserve Bank of Minneapolis.
  5. Michael B. Devereux & Henry E. Siu, 2007. "State Dependent Pricing And Business Cycle Asymmetries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 281-310, 02.
  6. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  7. Peter J. Klenow & Jonathan L. Willis, 2006. "Real rigidities and nominal price changes," Research Working Paper, Federal Reserve Bank of Kansas City RWP 06-03, Federal Reserve Bank of Kansas City.
  8. Virgiliu Midrigan, 2005. "Menu Costs, Multi-Product Firms and Aggregate Fluctuations," Macroeconomics, EconWPA 0511004, EconWPA.
  9. Midrigan, Virgiliu, 2006. "Menu costs, multi-product firms, and aggregate fluctuations," CFS Working Paper Series 2007/13, Center for Financial Studies (CFS).
  10. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2003. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Working Papers, Bar-Ilan University, Department of Economics 2003-07, Bar-Ilan University, Department of Economics.
  11. Morten O. Ravn & Martin Sola, 2004. "Asymmetric effects of monetary policy in the United States," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-60.
  12. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1261-82, November.
  13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, Elsevier, vol. 20(2), pages 177-181.
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Cited by:
  1. Dirk Van den Poel & Benjamin Verhelst, 2011. "Price Rigidity in Europe and the US: A Comparative Analysis Using Scanner Data," 2011 Meeting Papers 524, Society for Economic Dynamics.

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