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Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints

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  • Balleer, Almut
  • Hristov, Nikolay
  • Menno, Dominik

Abstract

We study how credit constraints and the frequency of price adjustment interact. We show that a working capital constraint increases the kurtosis of the price change distribution and generates small and large price changes to co-exist in a menu cost model. Our model is consistent with firm- level evidence for Germany that relates financial constraints to the frequency and direction of price changes. Financial frictions change the propagation of aggregate nominal shocks: The frequency of price adjustments fluctuates and the average price-adjustment size falls weakening the selection effect. Monetary non-neutrality only increases when the overall level of price adjustment falls.

Suggested Citation

  • Balleer, Almut & Hristov, Nikolay & Menno, Dominik, 2020. "Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints," CEPR Discussion Papers 11790, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11790
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    Cited by:

    1. Benjamin Born & Johannes Pfeifer, 2021. "Uncertainty‐driven business cycles: Assessing the markup channel," Quantitative Economics, Econometric Society, vol. 12(2), pages 587-623, May.
    2. Balleer, Almut & Link, Sebastian & Menkhoff, Manuel & Zorn, Peter, 2020. "Demand or Supply? Price Adjustment during the COVID-19 Pandemic," IZA Discussion Papers 13568, Institute of Labor Economics (IZA).
    3. Balleer, Almut & Zorn, Peter, 2019. "Monetary Policy, Price Setting, and Credit Constraints," CEPR Discussion Papers 14163, C.E.P.R. Discussion Papers.
    4. Nicoletta Berardi, 2024. "R(a)ising Prices While Struggling: Firms’ Financial Constraints and Price Setting," Working papers 942, Banque de France.
    5. Grimme, Christian & Henzel, Steffen R., 2024. "Uncertainty and credit conditions: Non-linear evidence from firm-level data," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1307-1323.
    6. Christian Grimme & Steffen Henzel, 2020. "Increasing Business Uncertainty and Credit Conditions in Times of Low and High Uncertainty: Evidence from Firm-Level Survey Data," CESifo Working Paper Series 8791, CESifo.
    7. Henkel, Lukas, 2020. "Sectoral output effects of monetary policy: do sticky prices matter?," Working Paper Series 2473, European Central Bank.
    8. Donato Masciandaro, 2018. "Central Banking and Macroeconomic Ideas: Economics, Politics and History," BAFFI CAREFIN Working Papers 1858, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    9. Grimme, Christian & Henzel, Steffen, 2023. "Uncertainty Shocks in Times of Low and High Uncertainty," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277629, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Frequency of price adjustment; Financial frictions; Menu cost model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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