Menu Costs, Aggregate Fluctuations, and Large Shocks
Abstract
We 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)
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In the case of large shocks, offline prices may be less rigid than during usual times.
“In the case of large shocks, there is a stronger argument that offline prices may be less rigid than during usual times(Karadi and Reiff, 2019)”
From Sanctions and Russian online prices (2024) · cites this paper as Karadi and Reiff, 2019
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References 61 · Cited by 95
- Authors
- Karadi, P., & Reiff, A.
- Affiliations
- European Central Bank, Sonnemannstrasse 20, Frankfurt am Main, 60640, Germany, and CEPR (email: )
- Magyar Nemzeti Bank (the Central Bank of Hungary), Szabadsag ter 8-9, Budapest, Hungary (email: )
- Venue
- American Economic Journal: Macroeconomics
- Publisher
- American Economic Association
- Published
- 2019-07-01
- Volume
- 11
- Issue
- 3
- Pages
- 111-146
- ISSN
- 1945-7707 (ISSN-L)
- 1945-7715
- OpenAlex
- W1533538566
- Cited by
- 95
- References
- 61
- Citations by year
- 2026: 6 · 2025: 11 · 2024: 18 · 2023: 13 · 2022: 19 · 2021: 11 · 2020: 4 · 2019: 3 · 2018: 4 · 2017: 5 · 2015: 1
- FWCI
- 19.92
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Journal Macroeconomics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Economic Theory and Policy
- Keywords
- menu costs, aggregate price level, asymmetric price adjustment, value added tax, trend inflation, monetary policy shocks, aggregate fluctuations
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