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Menu Costs at Work: Restaurant Prices and the Introduction of the Euro

  • Bart Hobijn
  • Federico Ravenna
  • Andrea Tambalotti

Restaurant prices in the euro area increased dramatically after the introduction of the euro. We show that this increase can be explained by a common menu cost model, extended to include a state-dependent decision of firms on when to adopt the new currency. Two mechanisms drive this result. First, firms concentrate otherwise staggered price increases around the changeover. Second, before the adoption of the euro, prices do not reflect the marginal cost increases expected to occur after the changeover. This "horizon effect" disappears as soon as the new currency is adopted, causing a jump in the optimal price. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 121 (2006)
Issue (Month): 3 (08)
Pages: 1103-1131

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Handle: RePEc:tpr:qjecon:v:121:y:2006:i:3:p:1103-1131
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