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Menu Costs and Asymmetric Price Adjustment

Author

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  • Ellingsen, Tore
  • Friberg, Richard
  • Hassler, John

Abstract

We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The associated kink in the steady state short-run Phillips curve implies that the output loss associated with a small negative inflation surprise is about twice as large as the output gain associated with a small positive inflation surprise.

Suggested Citation

  • Ellingsen, Tore & Friberg, Richard & Hassler, John, 2006. "Menu Costs and Asymmetric Price Adjustment," CEPR Discussion Papers 5749, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5749
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Adam Reiff & Peter Karadi, 2011. "Large Shocks in Menu Cost Models," 2011 Meeting Papers 884, Society for Economic Dynamics.
    2. James Yetman, 2009. "Hong Kong Consumer Prices are Flexible," Working Papers 052009, Hong Kong Institute for Monetary Research.
    3. Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2014. "Asymmetric Price Adjustment - Evidence For India," Working Papers 2014-094, Madras School of Economics,Chennai,India.
    4. Ralph-C Bayer & Changxia Ke, 2010. "Rockets and Feathers in the Laboratory," School of Economics Working Papers 2010-20, University of Adelaide, School of Economics.
    5. Kenichi MATSUMOTO & Azusa OKAGAWA, "undated". "Analysis of Economic and Environmental Impacts of CO2 Abatement in Japan Applying a CGE Model with Knowledge Investment," EcoMod2010 259600115, EcoMod.
    6. Péter Karádi & Ádám Reiff, 2010. "Inflation asymmetry, menu costs and aggregation bias – A further case for state dependent pricing," MNB Working Papers 2010/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    7. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.

    More about this item

    Keywords

    asymmetric price adjustment; downward rigidity; menu costs; Phillips curve;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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