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Menu Costs, Aggregate Fluctuations, and Large Shocks†

Menu Costs, Aggregate Fluctuations, and Large Shocks† AbstractWe document that the aggregate price level responds flexibly and asymmetrically to large positive and negative value-added tax changes. We present a price-setting model with menu costs, trend inflation, and fat-tailed product-level shocks that is consistent with these observations. The model predicts a flexible price-level response to standard monetary policy shocks because it anticipates a large number of firms on the verge of price adjustment and far from their optimal prices when the shock hits. (JEL E31, E32, E52, E62, H25) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Menu Costs, Aggregate Fluctuations, and Large Shocks†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20160054
Publisher site
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Abstract

AbstractWe document that the aggregate price level responds flexibly and asymmetrically to large positive and negative value-added tax changes. We present a price-setting model with menu costs, trend inflation, and fat-tailed product-level shocks that is consistent with these observations. The model predicts a flexible price-level response to standard monetary policy shocks because it anticipates a large number of firms on the verge of price adjustment and far from their optimal prices when the shock hits. (JEL E31, E32, E52, E62, H25)

Journal

American Economic Journal: Macroeconomics – American Economic Association

Published: Jul 1, 2019

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