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Menu Costs at Work: Restaurant Prices and the Introduction of the Euro

  • Bart Hobijn
  • Andrea Tanbalotti

    ()

    (Research and Statistics Group Federal Reserve Bank of New York)

  • Federico Ravenna

Restaurant prices in the euro area increased dramatically after the introduction of the euro. We show that this increase can be explained by a common menu cost model, extended to include a state-dependent decision of firms on when to adopt the new currency. Two mechanisms drive this result. First, firms concentrate otherwise staggered price increases around the changeover. Second, before the adoption of the euro, prices do not reflect the marginal cost increases expected to occur after the changeover. This "horizon effect" disappears as soon as the new currency is adopted, causing a jump in the optimal price. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 659.

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Date of creation: 2005
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Handle: RePEc:red:sed005:659
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