Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks

Isaac Baley and Andrés Blanco

No 918, Working Papers from Barcelona School of Economics

Abstract: Nominal shocks have long-lasting effects on real economic activity, beyond those implied by standard models that target the average frequency of price adjustment in micro data. This paper develops a price-setting model that explains this gap through the interplay of menu costs and uncertainty about idiosyncratic productivity. Uncertainty arises from firms' inability to distinguish between permanent and transitory productivity changes. Upon the arrival of a productivity shock, a firm's uncertainty spikes up and then fades with learning until the next shock arrives. These uncertainty cycles, when paired with menu costs, generate recurrent episodes of high adjustment frequency followed by episodes of low adjustment frequency at the firm level. A decreasing hazard rate of price adjustment results, as in the data. Taking into account this pricing behavior amplifies the persistence and reduces the pass-through of nominal shocks.

Keywords: menu costs; uncertainty; information frictions; monetary policy; hazard rates (search for similar items in EconPapers)
JEL-codes: D8 E3 E5 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-cse and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/918.pdf (application/pdf)

Related works:
Working Paper: Menu costs, uncertainty cycles, and the propagation of nominal shocks (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:918

Access Statistics for this paper

More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bruno Guallar ().