Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83605
Authors: 
Karádi, Péter
Reiff, Ádám
Year of Publication: 
2010
Series/Report no.: 
MNB Working Papers 2010/3
Abstract: 
Asymmetric inflation response to aggregate shocks is an identifying macro-prediction of state dependent pricing models with trend inflation (Ball and Mankiw, 1994). The paper uses the natural experiment of symmetric value-added tax (VAT) changes in Hungary with highly asymmetric inflation responses to provide further evidence for state-dependent pricing and for the Ball-Mankiw conjecture. The paper shows, furthermore, that while a standard menu cost model like that of Golosov and Lucas (2007) underestimates the observed asymmetry, a model of multi-product firms that takes sectoral heterogeneity explicitly into consideration can quantitatively account for the inflation asymmetry observed in the data. This aggregation bias of the standard model is the result of the strong interaction term between trend inflation and menu costs in determining asymmetry in the model, and the positive correlation between sectoral inflation rates and menu costs in the data. The paper implies that the real effects of negative monetary shocks can be substantial even in the standard Golosov and Lucas (2007) model if these additional factors are taken into consideration.
Subjects: 
Aggregation Bias
Inflation Asymmetry
Menu Cost
Sectoral Heterogeneity
Value-Added Tax
JEL: 
E30
Document Type: 
Working Paper

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