Menu Costs and Asymmetric Price Adjustment
26 Pages Posted: 23 Aug 2006
Date Written: July 2006
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: Suggested Citation