Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jul, 2011, Volume 79, Issue 4

Menu Costs, Multiproduct Firms, and Aggregate Fluctuations
p. 1139-1180

Virgiliu Midrigan

Golosov and Lucas recently argued that a menu‐cost model, when made consistent with salient features of the microdata, predicts approximate monetary neutrality. I argue here that their model misses, in fact, two important features of the data. First, the distribution of the size of price changes in the data is very dispersed. Second, in the data many price changes are temporary. I study an extension of the simple menu‐cost model to a multiproduct setting in which firms face economies of scope in adjusting posted and regular prices. The model, because of its ability to replicate this additional set of microeconomic facts, predicts real effects of monetary policy shocks that are much greater than those in Golosov and Lucas and nearly as large as those in the Calvo model. Although episodes of sales account for roughly 40% of all goods sold in retail stores, the model predicts that these episodes do not contribute much to the flexibility of the aggregate price level.

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Supplemental Material

Supplement to "Menu Costs, Multi-Product Firms, and Aggregate Fluctuations"

A zip file containing replication files for the manuscript.

Supplement to "Menu Costs, Multi-Product Firms, and Aggregate Fluctuations"

Appendix 1 describes the algorithm used to construct the regular price series.  Appendix 2 describes the computational algorithm used to characterize decision rules and the equilibrium in the model economy.  Appendix 3 studies an extension of the model in which the retailer face a fixed cost of changing the temporary price, in addition to the cost of deviating from the regular price.