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Menu Costs, Aggregate Fluctuations, and Large Shocks

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  • Karadi, Peter
  • Reiff, Adam

Abstract

How do frictions in price setting influence monetary non-neutrality? We revisit this classic question in a quantitative menu cost model with multi-product firms that face idiosyncratic shocks with unsynchronized stochastic volatility. The model matches the unconditional distribution of price changes and successfully predicts new evidence on pricing responses to large value-added tax shocks. In particular, it captures both the exploding fraction of price changes and the shape of their conditional distribution, outperforming alternative models. The model generates near money neutrality even to small nominal shocks.

Suggested Citation

  • Karadi, Peter & Reiff, Adam, 2014. "Menu Costs, Aggregate Fluctuations, and Large Shocks," CEPR Discussion Papers 10138, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10138
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    Cited by:

    1. Hobijn, Bart & Nechio, Fernanda, 2015. "Sticker shocks: using VAT changes to estimate upper-level elasticities of substitution," Working Paper Series 2015-17, Federal Reserve Bank of San Francisco, revised Oct 2017.
    2. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    3. Adam Reiff & Peter Karadi, 2014. "Menu Costs, Aggregate Fluctuations and Large Shocks," 2014 Meeting Papers 914, Society for Economic Dynamics.
    4. Carlsson, Mikael, 2014. "Selection Effects in Producer-Price Setting," Working Paper Series 2014:6, Uppsala University, Department of Economics.
    5. Isaac Baley & Julio A. Blanco, 2016. "Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks," Working Papers 918, Barcelona Graduate School of Economics.
    6. Zsombor Cseres-Gergely & Gyorgy Molnar & Tibor Szabo, 2017. "Expenditure responses, policy interventions and heterogeneous welfare effects in Hungary during the 2000s," IEHAS Discussion Papers 1704, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

    More about this item

    Keywords

    monetary policy transmission; price change distribution; state-dependent pricing; value-added tax;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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