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Price Stickiness: Empirical Evidence of the Menu Cost Channel

Author

Listed:
  • Eric Anderson

    (Northwestern University)

  • Nir Jaimovich

    (University of Southern California)

  • Duncan Simester

    (Massachusetts Institute of Technology)

Abstract
A leading explanation in the economic literature is that monetary policy has real effects on the economy because firms incur a cost when changing prices. Using a unique database of cost and retail price changes, we find that variation in menu costs results in up to 13.3% fewer price increases. We confirm that these effects are allocative and have a persistent impact on both prices and unit sales. We provide evidence that the menu cost channel operates only when cost increases are small in magnitude, which is consistent with theory and provides the first empirical evidence of boundary conditions.

Suggested Citation

  • Eric Anderson & Nir Jaimovich & Duncan Simester, 2015. "Price Stickiness: Empirical Evidence of the Menu Cost Channel," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 813-826, October.
    • Handle: RePEc:tpr:restat:v:97:y:2015:i:4:p:813-826
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00507
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    More about this item

    Keywords

    menu costs; price increases; price changes; monetary policy;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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