Discussion paper
DP11790 Menu costs, the price gap distribution and monetary non-neutrality: The role of financial constraints
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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