Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model

74 Pages Posted: 25 May 2018

See all articles by Erwan Gautier

Erwan Gautier

Banque de France - Centre de Recherche

Hervé le Bihan

Banque de France - Centre de Recherche

Date Written: May 2018

Abstract

Relying on a menu-cost model augmented with a time-dependent (Calvo) component, we investigate the structural sources of cross-sectoral heterogeneity in patterns of price setting. We use a large micro dataset of French consumer prices to estimate the model at the product level for 227 products. The Calvo component is found to be large in most sectors. Heterogeneity in structural parameters is also substantial. The combination of these two features leads to much larger real effects of monetary policy. The effect of monetary shock on output is more than 4 times larger than the one derived from a standard single-sector menu-cost model estimated using average moments.

Keywords: Price rigidity, menu cost, (S,s) models, adjustment cost, heterogeneity

JEL Classification: E31, D43, L11

Suggested Citation

Gautier, Erwan and Le Bihan, Herve, Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model (May 2018). Banque de France Working Paper No. 682, Available at SSRN: https://ssrn.com/abstract=3184728 or http://dx.doi.org/10.2139/ssrn.3184728

Erwan Gautier (Contact Author)

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
75049 Paris Cedex 01
France

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