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Sectoral heterogeneities in price rigidity and returns to scale

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  • Mohamed Diaby
  • Atsuyoshi Morozumi

Abstract

Previous research on price-setting has shown that the degree of nominal price rigidity differs substantially across sectors. This paper proposes returns to scale as a key determinant of this sectoral heterogeneity in price rigidity. We develop a multi-sector menu cost model with heterogeneity in returns to scale and sectoral idiosyncratic shocks, and show analytically that a sector with higher returns to scale is associated with larger price rigidity. Numerical experiments using estimated returns to scale for US manufacturing sectors suggest that the e ect of returns to scale is quantitatively large. We also provide empirical evidence consistent with the theoretical prediction.

Suggested Citation

  • Mohamed Diaby & Atsuyoshi Morozumi, 2019. "Sectoral heterogeneities in price rigidity and returns to scale," Discussion Papers 2019/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:19/05
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    References listed on IDEAS

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    Keywords

    Menu costs; Sectoral heterogeneity; Price rigidity; Returns to scale;
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