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Title: Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints

Author(s): Almut Balleer, Nikolay Hristov and Dominik Menno

Publication Date: January 2017

Keyword(s): Financial Frictions, Frequency of price adjustment and menu cost model

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We study how credit constraints and the frequency of price adjustment interact. We show that a working capital constraint increases the kurtosis of the price change distribution and generates small and large price changes to co-exist in a menu cost model. Our model is consistent with firm- level evidence for Germany that relates financial constraints to the frequency and direction of price changes. Financial frictions change the propagation of aggregate nominal shocks: The frequency of price adjustments fluctuates and the average price-adjustment size falls weakening the selection effect. Monetary non-neutrality only increases when the overall level of price adjustment falls.

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Bibliographic Reference

Balleer, A, Hristov, N and Menno, D. 2017. 'Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11790