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The Magnitude of Menu Costs: A Structural Estimation

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  • Andrea Stella

    (Federal Reserve Board)

Abstract

The leading theories on monetary policy non-neutrality require some degree of price rigidity, which is often introduced by assuming fixed costs of price adjustment, also known as menu costs. Empirical evidence on the existence of such menu costs is scarce. Using weekly data on prices, costs and units sold by a supermarket chain, I estimate a discrete-choice dynamic model of a multi-product firm facing menu costs with a moment inequalities approach. This empirical methodology allows me to estimate two types of fixed costs of price adjustment: costs that are independent of the number of items that change prices and costs that are incurred at each item’s price change. I find that both types of menu costs exist and are substantial. The total cost from changing prices is estimated to be bounded between 0.22% and 0.59% of revenues and between 11.05% and 29.32% of net margins, depending on the specification. The first type of fixed cost accounts for up to 85% of this expense, pointing to substantial economies of scope in price setting.

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  • Andrea Stella, 2014. "The Magnitude of Menu Costs: A Structural Estimation," 2014 Meeting Papers 436, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:436
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    2. Frédérique Bec & Raouf Boucekkine & Caroline Jardet, 2023. "Why Are Inflation Forecasts Sticky? Theory and Application to France and Germany," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 215-249, October.
    3. 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.
    4. Arnildo Correa & Myrian Petrassi & Rafael Santos, 2018. "Price-Setting Behavior in Brazil: Survey Evidence," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 14(2), pages 283-310, November.
    5. Matthew Klepacz, 2018. "Price Setting and Volatility: Evidence from Oil Price Volatility Shocks," 2018 Meeting Papers 145, Society for Economic Dynamics.
    6. Matthew Klepacz, 2021. "Price Setting and Volatility: Evidence from Oil Price Volatility Shocks," International Finance Discussion Papers 1316, Board of Governors of the Federal Reserve System (U.S.).
    7. 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).
    8. Váry, Miklós, 2021. "The long-run real effects of monetary shocks: Lessons from a hybrid post-Keynesian-DSGE-agent-based menu cost model," Economic Modelling, Elsevier, vol. 105(C).

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