Menu Costs and Asymmetric Price Adjustment

26 Pages Posted: 23 Aug 2006

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Richard Friberg

Stockholm School of Economics - Department of Economics

John Hassler

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: July 2006

Abstract

We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The associated kink in the steady state short-run Phillips curve implies that the output loss associated with a small negative inflation surprise is about twice as large as the output gain associated with a small positive inflation surprise.

Keywords: asymmetric price adjustment, downward rigidity, menu costs, Phillips curve

JEL Classification: D42, E31, E32

Suggested Citation

Ellingsen, Tore and Friberg, Richard and Hassler, John, Menu Costs and Asymmetric Price Adjustment (July 2006). CEPR Discussion Paper No. 5749. Available at SSRN: https://ssrn.com/abstract=926154

Tore Ellingsen

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9260 (Phone)
+46 8 31 3207 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Richard Friberg

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9645 (Phone)
+46 8 720 7752 (Fax)

John Hassler (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 816 2070 (Phone)
+46 816 1443 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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