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Title: Menu Costs and Asymmetric Price Adjustment

Author(s): Tore Ellingsen, Richard Friberg and John Hassler

Publication Date: July 2006

Keyword(s): asymmetric price adjustment, downward rigidity, menu costs and Phillips curve

Programme Area(s): International Macroeconomics

Abstract: 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.

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Bibliographic Reference

Ellingsen, T, Friberg, R and Hassler, J. 2006. 'Menu Costs and Asymmetric Price Adjustment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5749