The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be...

How do prices react to large aggregate shocks? Our new micro-data evidence on value-added tax changes shows that prices react (i) flexibly and (ii) asymmetrically to large positive and negative shocks. We use it to quantitatively evaluate the performance of prominent pricing models. We show that...

evidence on the asymmetry of inflation response to aggregate shocks. We show that even though a standard menu cost model like that of Golosov and Lucas (2007) underestimates the asymmetry, a sectoral menu cost model with multi-product firms and trend-inflation can quantitatively account for the...

In menu cost models, real effects of aggregate nominal shocks are sensitive to unobserved characteristics of price setting. The standard way to calibrate key pricing parameters is to match the cross-sectional distribution of price changes. We argue that this unconditional distribution contains...

How do frictions in price setting influence monetary non-neutrality? We revisit this classic question in a quantitative menu cost model with multi-product firms that face idiosyncratic shocks with unsynchronized stochastic volatility. The model matches the unconditional distribution of price...

Real effects of monetary policy shocks in menu cost models depend crucially on the distribution of the size of price changes. With a realistically high kurtosis, Midrigan (2011) overturned the standard Golosov and Lucas (2007) result of small and temporary real effects and found them nearly as...

quantifying gravity- and border-effects in price setting behavior.

We argue that the underlying width of the border in international price determination is a trivial fraction of the corresponding Engel and Rogers (1996) reduced form estimate. We develop a two-country, multi-region, dynamic, stochastic equilibrium model of monopolistic competition with costly...

Using a comprehensive data set on retail prices across the euro area, we analyse within- and cross-country price dispersion in European countries. First, we study price dispersion over time, by investigating the time-series evolution of the coefficient of variation, calculated from price levels....