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Menu Costs and Phillips Curves

  • Mikhail Golosov
  • Robert E. Lucas Jr.

This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real “menu cost.†We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies. The model is also used to conduct numerical experiments on the economy’s response to various shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): ()
Pages: 171-199

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Handle: RePEc:ucp:jpolec:v:115:y:2007:p:171-199
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  1. Etienne Gagnon, 2006. "Price Setting during Low and High Inflation: Evidence from Mexico," 2006 Meeting Papers 300, Society for Economic Dynamics.
  2. Mark Gertler & John V. Leahy, 2006. "A Phillips curve with an Ss foundation," Working Papers 06-8, Federal Reserve Bank of Philadelphia.
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  17. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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