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Menu Costs and Inflation Asymmetries Some Micro Data Evidence

  • Peter Karadi


    (New York University)

  • Adam Reiff


    (Central Bank of Hungary)

The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be explained by the interaction of menu costs, (sectoral) trend inflation and forward-looking firms, thereby it provides direct evidence to the argument of Ball and Mankiw (1994).

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0706.

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Length: 34 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:has:discpr:0706
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  1. Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers 1602, Harvard - Institute of Economic Research.
  2. Peter J. Klenow & Jonathan L. Willis, 2006. "Real rigidities and nominal price changes," Research Working Paper RWP 06-03, Federal Reserve Bank of Kansas City.
  3. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  4. Morten O. Ravn & Martin Sola, 2004. "Asymmetric effects of monetary policy in the United States," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-60.
  5. repec:tpr:qjecon:v:123:y:2008:i:4:p:1415-1464 is not listed on IDEAS
  6. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
  7. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  8. Michael B. Devereux & Henry E. Siu, 2007. "State Dependent Pricing And Business Cycle Asymmetries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 281-310, 02.
  9. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  10. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
  11. Midrigan, Virgiliu, 2006. "Menu costs, multi-product firms, and aggregate fluctuations," CFS Working Paper Series 2007/13, Center for Financial Studies (CFS).
  12. repec:tpr:qjecon:v:107:y:1992:i:4:p:1261-82 is not listed on IDEAS
  13. Virgiliu Midrigan, 2005. "Menu Costs, Multi-Product Firms and Aggregate Fluctuations," Macroeconomics 0511004, EconWPA.
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