Price Stickiness: Empirical Evidence of the Menu Cost Channel

Eric T. Anderson; Nir Jaimovich; Duncan Simester

doi:10.1162/rest_a_00507

Price Stickiness: Empirical Evidence of the Menu Cost Channel

Eric T. Anderson¹; Nir Jaimovich²; Duncan Simester^3,4

¹ Northwestern University · ² Duke University · ³ Moscow Institute of Thermal Technology · ⁴ Massachusetts Institute of Technology

The Review of Economics and Statistics 2015

A leading explanation in the economic literature is that monetary policy has real effects on the economy because firms incur a cost when changing prices. Using a unique database of cost and retail price changes, we find that variation in menu costs results in up to 13.3% fewer price increases. We confirm that these effects are allocative and have a persistent impact on both prices and unit sales. We provide evidence that the menu cost channel operates only when cost increases are small in magnitude, which is consistent with theory and provides the first empirical evidence of boundary conditions.

DOI: 10.1162/rest_a_00507
Volume: 97 (4)
Pages: 813-826
Language: en
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