International Menu Costs and Price Dynamics

In this paper, I analyze how the pricing behavior of firms systematically differs across domes- tic and export markets in terms of frequency, timing and size of price changes. First, I contrast domestic and export pricing decisions for the same products showing that (i) domestic producer prices change approximately twice as often as export producer prices, (ii) the probability of syn- chronized price adjustment across markets is 21% for upwards adjustments and 14% for downwards adjustments, (iii) the size of export price changes is substantially larger than the size of domes- tic price changes and (iv) there are strong seasonality effects in the data including a year-end synchronization effect. Second, I show that economic fundamentals such as inflation, productiv- ity, demand, exchange rates and market structure can only partially explain adjustment decisions and cross-market synchronization. Third, I present a dynamic menu cost model of price-setting, and attribute the remaining unexplained part in adjustment decisions to di erences in menu costs across countries. I calculate the implied export and domestic market menu costs from the data and estimate that export menu costs are 1.5% of period steady state revenues and three times as large as domestic market menu costs.