American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Menu Costs, Aggregate Fluctuations, and Large Shocks
American Economic Journal: Macroeconomics
vol. 11,
no. 3, July 2019
(pp. 111–46)
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.20160054Additional 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)