Menu Costs and Phillips Curves
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); New Economic School (NES)
Robert E. Lucas Jr.
University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)
Journal of Political Economy, Vol. 115, 2007
This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real 'menu cost'. We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies. The model is also used to conduct numerical experiments on the economy's response to various shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.
Accepted Paper Series
Date posted: April 23, 2007
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