Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models

Abstract

We use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost. This self‐selection of price changes is a key feature in the canonical Menu‐Cost model a la Golosov and Lucas Jr. (2007), which may generate near monetary neutrality (Golosov and Lucas Jr. 2007, Karadi and Reiff 2016), but is absent in the Calvo (1983) model. We find that the microdata strongly favors the Calvo (1983) model. Thus, upstream in the supply chain, price setting is best characterized by a very low degree of self‐selection into price changes.

Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model

“…Thus, for the typical sector, the Calvo component of the model is rather large as compared to the menu cost component. This finding matches evidence reported on producer prices by Carlsson (2017) using Swedish micro data and Alvarez, Le Bihan, and Lippi (2016) on the same French CPI data using a sufficient statistics approach.…”

Pricing Behaviour and Menu Costs in Multi‐product Firms

“…An important implication of this finding is that firms are less inclined to self-select into price changes in the 'Scope' case. Self-selection, as discussed by Golosov and Lucas (2007), Midrigan (2011) and Carlsson (2017), occurs when price changes are driven by a cost-benefit analysis. Non-neutrality of monetary policy is determined by the extent to which such selection effects exist.…”

“…However, note that within-industry synchronization of prices has been found to be negligible in practice (Nilsen et al 2021). We follow Rotemberg and Woodford (1999) and Carlsson (2017), and consider that wages are a fundamental cost component driving prices.…”

“…Third, our analysis also contributes to the understanding of self‐selection of firms into changing prices. The degree to which this phenomenon occurs affects non‐neutrality of monetary policy (Golosov and Lucas 2007; Midrigan 2011; Carlsson 2017). Based on the results, we argue that economies of scope reduce firms self‐selecting into a price change regime.…”

Shocks versus Menu Costs: Patterns of Price Rigidity in an Estimated Multisector Menu-Cost Model

“…To our knowledge, such structural menu cost models have not been previously estimated on micro data for a euro-area economy. Previous studies on European economies include Karadi and Reiff (2014) and Carlsson (2017) who estimate parameters of menu-cost models respectively using food CPI Hungarian data and on Swedish producer price data. 3 Moreover, we here cover a large number of CPI sectors including services, whereas most macro models are calibrated using micro data for some specific sectors or using grocery price data (Nakamura and Steinsson (2010) being a prominent exception).…”