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The roles of price points and menu costs in price rigidity

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  • Edward S. Knotek

Abstract

Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using supermarket scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for more than 60 percent of prices; (2) at the conclusion of sales, post-sale prices return to their pre-sale levels nearly 90 percent of the time. I construct a model that nests roles for menu costs and price points and estimate model variants via simulated method of moments. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs in this model. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics.

Suggested Citation

  • Edward S. Knotek, 2010. "The roles of price points and menu costs in price rigidity," Research Working Paper RWP 10-18, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp10-18
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    References listed on IDEAS

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    1. Price points, good diversity and price rigidity
      by Economic Logician in Economic Logic on 2011-02-17 21:17:00

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    1. repec:cai:ecoldc:ecop_210_0001 is not listed on IDEAS
    2. Erwan Gautier & Ronan Le Saout, 2015. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1063-1089, September.
    3. Erwan Gautier & Ronan Le Saout, 2017. "L’ajustement microéconomique des prix des carburants en France," Economie & Prévision, La Documentation Française, pages 1-24.

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