Menu costs, price dispersion, and aggregate fluctuations

by 1979- Midrigan, Virgiliu

I address the micro-foundations and aggregate consequences of sluggish price adjustment. A major theme of this investigation is the explicit modeling of the frictions that give rise to nominal rigidities; namely, fixed (menu) costs of adjusting prices. This dissertation consists of three chapters. The first chapter asks whether nominal rigidities arise either (i) because of physical costs of price adjustment or (ii) because of information-gathering costs. If the state of the world is observed costlessly and physical adjustment costs are the source of price stickiness, firms are more likely to reprice in periods when aggregate and idiosyncratic shocks reinforce each other, thus triggering desired price changes in the same direction. I find strong support for this implication of the menu cost model using data for fourdigit U.S. manufacturing industries and measures of technology shocks derived from production-function estimates.