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Price Setting with menu cost for Multi-product firms

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  • Fernando E. Alvarez
  • Francesco Lippi

Abstract

We model the decisions of a multi-product firm that faces a fixed “menu” cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decisions in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17923.

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Date of creation: Mar 2012
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Publication status: published as Price setting with menu cost for multi-product firms, with Francesco Lippi, 2013. forthcoming, Econometrica.
Handle: RePEc:nbr:nberwo:17923

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  1. Alvarez, Fernando E & Lippi, Francesco & Paciello, Luigi, 2010. "Optimal price setting with observation and menu costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7861, C.E.P.R. Discussion Papers.
  2. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2009. "How rigid are producer prices?," Staff Reports, Federal Reserve Bank of New York 407, Federal Reserve Bank of New York.
  3. Marco Bonomo & Carlos Carvalho, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Macroeconomics, EconWPA 0402005, EconWPA, revised 19 May 2005.
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  7. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  8. Saroj Bhattarai & Raphael Schoenle, 2011. "Multiproduct firms and price-setting: theory and evidence from U.S. producer prices," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 73, Federal Reserve Bank of Dallas.
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  13. francesco lippi & Luigi Paciello & Fernando Alvarez, 2012. "Monetary Shocks with Observation and Menu Costs," 2012 Meeting Papers, Society for Economic Dynamics 439, Society for Economic Dynamics.
  14. Alberto Cavallo & Roberto Rigobon, 2011. "The Distribution of the Size of Price Changes," NBER Working Papers 16760, National Bureau of Economic Research, Inc.
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  19. Tsiddon, Daniel, 1993. "The (Mis)Behaviour of the Aggregate Price Level," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 889-902, October.
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  21. Etienne Gagnon, 2006. "Price Setting during Low and High Inflation: Evidence from Mexico," 2006 Meeting Papers, Society for Economic Dynamics 300, Society for Economic Dynamics.
  22. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 349-89, April.
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  24. Martin S. Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2012. "How Frequent Are Small Price Changes?," NBER Working Papers 17956, National Bureau of Economic Research, Inc.
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Cited by:
  1. Emi Nakamura & J�n Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 133-163, 05.
  2. Alvarez, Fernando & Dixit, Avinash, 2014. "A real options perspective on the future of the Euro," Journal of Monetary Economics, Elsevier, Elsevier, vol. 61(C), pages 78-109.
  3. Martin S. Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2012. "How Frequent Are Small Price Changes?," NBER Working Papers 17956, National Bureau of Economic Research, Inc.
  4. Julio Blanco & Isaac Baley, 2013. "Learning to Price," 2013 Meeting Papers, Society for Economic Dynamics 663, Society for Economic Dynamics.
  5. Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  6. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers, Society for Economic Dynamics 126, Society for Economic Dynamics.

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