Menu Costs, Multiproduct Firms, and Aggregate Fluctuations


  • Virgiliu Midrigan

    1. Dept. of Economics, New York University, 19 West 4th Street, 6th Floor, New York, NY 10012, U.S.A.;
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    • I am indebted to George Alessandria, Bill Dupor, Paul Evans, Patrick Kehoe, and Mario Miranda for valuable advice and support, as well as Ariel Burstein, Michael Dotsey, Mark Gertler, Narayana Kocherlakota, Ellen McGrattan, John Leahy, Martin Schneider, Takayuki Tsuruga, Ivan Werning, and Harald Uhlig for comments and suggestions. I acknowledge the James M. Kilts Center, GSB, University of Chicago, for making the data used in this study available. Any errors are my own.


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.