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  3. American Economic Journal: Macroeconomics
  4. July 2019
  5. Menu Costs, Aggregate Fluctuations, and Large Shocks

Menu Costs, Aggregate Fluctuations, and Large Shocks

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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.

Citation

Karadi, Peter, and Adam Reiff. 2019. "Menu Costs, Aggregate Fluctuations, and Large Shocks." American Economic Journal: Macroeconomics, 11 (3): 111-46. DOI: 10.1257/mac.20160054

Additional Materials

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
  • E62 Fiscal Policy
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
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