Macro Seminar - Virgiliu Midrigan (NYU)

Abstract: We show that canonical menu cost models, when parameterized to match the distribution of price changes, cannot reproduce the extent to which the fraction of price changes increases with inflation. They also require implausibly large menu costs and predict large losses from misallocation in the presence of microeconomic strategic complementarities. We resolve these shortcomings by extending the standard multi-product menu cost model along two dimensions. First, we assume that the products sold by a firm are imperfect substitutes. Second, we assume that strategic complementarities are at the firm, not the product level. In contrast to standard models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear and asymmetric Phillips curve

Location: LG01 Euston Road 222