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Does Product Revenue Matter for Price Setting and Monetary Policy Transmission?

Author

Listed:
  • DongIk Kang

    (Korea Institute of Public Finance)

  • Andrew Usher

    (Bank of Canada)

Abstract

Using retail scanner data, we find that the probability of price adjustment increases with a product's revenue, and the average absolute size of price adjustment decreases with the product's revenue. Furthermore, the responsiveness of prices to monetary shocks increases with product revenue. These facts are consistent with menu cost models in which the menu cost increases less than one-for-one with revenue, and inconsistent with models in which the menu cost increases one-for-one with revenue. In a calibrated menu cost model, the real effect of monetary policy is smaller in economies in which the price response to monetary policy shocks increases with revenue than in economies where no such relationships exist. Together with cyclical shifts in the revenue distribution, the increase in price responsiveness with revenue introduces a counter-cyclical effect that strengthens the real effect of monetary policy during recessions. (Copyright: Elsevier)

Suggested Citation

  • DongIk Kang & Andrew Usher, 2023. "Does Product Revenue Matter for Price Setting and Monetary Policy Transmission?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 297-345, January.
  • Handle: RePEc:red:issued:21-291
    DOI: 10.1016/j.red.2022.02.001
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