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Do Menu Costs Make Prices Sticky?

Author

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  • Thomas A. Eife

    () (University of Heidelberg, Department of Economics)

Abstract

This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.

Suggested Citation

  • Thomas A. Eife, 2008. "Do Menu Costs Make Prices Sticky?," Working Papers 0477, University of Heidelberg, Department of Economics, revised Oct 2008.
  • Handle: RePEc:awi:wpaper:0477
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    File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp477.pdf
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    References listed on IDEAS

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    Cited by:

    1. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers 2006-06, Bank of Estonia, revised 12 Oct 2006.

    More about this item

    Keywords

    menu costs; price stickiness;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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