Menu Costs and the Bullwhip Effect: Supply Chain Implications of Dynamic Pricing

Suppose that technology reduces price-adjustment costs (e.g., the costs of printing and changing price tags), and as a result prices at grocery stores change more dynamically. Will this change mean less stability or more stability for grocery supply chains? In other words, will more dynamic pricing downstream mean more last-minute purchases, more overtime work, and more empty space in trucks and warehouses? Or will it mean more regular and more standardized orders, smoother schedules, and less waste? To answer this question, we fit a pricing and ordering model to data from a large Chinese supermarket chain (daily prices, sales, inventories, and shipments from products from seven categories at 78 stores for 3.5 years) and then simulate a counterfactual grocery chain in which the estimated price-adjustment costs are set to zero. We find that the removal of price-adjustment costs stabilizes the supply chain, reducing both its shipment volatility, its sales volatility, and its bullwhip (the difference between the shipment and sales volatility).

Optimal Inflation Target in an Economy with Menu Costs and a Zero Lower Bound

I study the optimal inflation target in a quantitative menu cost model with a zero lower bound on interest rates. I find that the optimal inflation target is 3.5 percent, which is higher than in models commonly used for monetary policy analysis. Key to this result is that inflation has a small effect on resource misallocation when the model features firm-level shocks, which are necessary to match the empirical distribution of price changes. A higher inflation target decreases price flexibility at the zero lower bound, and through this mechanism, it reduces the severity of recessions when the monetary authority is constrained. (JEL E12, E31, E32, E42, E52)

Price Setting and Volatility: Evidence from Oil Price Volatility Shocks

How do changes in aggregate volatility alter the impulse response of output to monetary policy? To analyze this question, I study whether individual prices in Producer Price Index micro data are more likely to change and to move in the same direction when aggregate volatility is high, which would increase aggregate price exibility and reduce the effectiveness of monetary policy. Taking advantage of plausibly exogenous oil price volatility shocks and heterogeneity in oil usage across industries, I find that price changes are more dispersed and less frequent, implying that prices are less likely to move in the same direction when aggregate volatility is high. This contrasts with findings in the literature about idiosyncratic volatility. I use a state-dependent pricing model to interpret my findings. Random menu costs are necessary for the model to match the positive empirical relationship between oil price volatility and price change dispersion. This is the case because random menu costs reduce the extent to which firms with prices far from their optimum all act in a coordinated fashion when volatility increases. The model implies that increases in aggregate volatility do not substantially reduce the ability of monetary policy to stimulate output.

What Kind Of Inflation Targeting Is Considered The Most Accepted In The Eu Economies?

This study aims to identify the optimal inflation target for the European Central Bank (ECB). It will argue that the current definition of price stability and thus, the target of 2% yearly increase in HICP is not relevant according to our macroeconomic projection in Eurozone. This study argues that very low inflation rates for the last years may signify a threat of deflation. Specifically, the study argues for asymmetric inflation targeting and recommend the ECB to reformulate its inflation target as “close to 2.5% from below and above”. This has to be done in order to counter possible deflation, lower unemployment, avoid the liquidity trap, and give more room for the ECB to conduct its macroeconomic policy under the threat of recession. It is also briefly illuminated some other benefits of higher inflation, such as the option of negative interest rates, seigniorage and money illusion, and the corresponding of the costs associated with higher inflation of 2.5%, such as shoe leather costs, menu costs, tax distortions and uncertainty due to price variability. It is assumed that the outcome of Cost-Benefit analysis for a 2.5% inflation target is not very different from that for a 2% level, while a greater increase in inflation target would produce unclear results.

New Keynesians and Inflation

This chapter reviews the basic tenets of the New Keynesians (NK); i.e. the school of thought that sought to preserve the insights of Keynes on the desirability of activist stabilization policy, but taking on board the methodological and other advances of the New Classicals. As markets do not clear due to price stickiness, the latter is thoroughly reviewed: causes, including ‘menu costs’, empirical evidence, and implications for price level dynamics are outlined. Other models of wage rigidity as well as new directions of NK theory are also reviewed. Furthermore, the chapter reviews inflation: its costs, causes, and recent ‘great moderation’. It concludes with a critical analysis of the NK model of inflation, and with a review of how this model of inflation can be incorporated into a baseline ‘three-equation New Keynesian model’.

Shocks vs Menu Costs: Patterns of Price Rigidity in an Estimated Multi-Sector Menu-Cost Model

Sectoral heterogeneity matters for monetary policy. Using CPI microdata, we estimate for 227 products a time–varying menu-cost model to investigate the quantitative relevance of this heterogeneity. We find a substantial degree of cross-sectoral heterogeneity in all structural parameters. Heterogeneity in the Calvo component of the pricing friction is however the main source of heterogeneity in price rigidity. Cross-sectoral heterogeneity amplifies the output effect of a monetary shock by a factor of about 2.5, compared to a single-sector model estimated with mean moments. Heterogeneity in the Calvo parameter plays a key role in this amplification.

The Effects of Menu Costs on Retail Performance: Evidence from Adoption of the Electronic Shelf Label Technology

We use the adoption of electronic shelf labels (ESLs) by an international grocery retailer in 2015 to identify the effects of physical menu costs (i.e., labor and material costs of price adjustment) on retail performance. We find that the installation of ESLs increased gross margins substantially, which implies profit gains that go far beyond labor cost savings. We also explore the mechanism behind this effect. We find that the lift in gross margins was associated with an increase in quantity sold and a decrease in price per unit sold, and that the lift primarily came from low-shelf life product categories. Moreover, we find that more and smaller price changes occurred with ESLs. These additional price changes were mostly price decreases, and they were dispersed in time. Our findings are consistent with reductions in both variable and fixed menu costs (i.e., both costs that scale with the number of products affected and costs that do not). This paper was accepted by Vishal Gaur, operations management.

PRICE FLEXIBILITY AND OUTPUT VOLATILITY UNDER MENU COSTS

This paper studies the implications of price flexibility on output volatility under menu costs and finds price flexibility to be output-destabilizing under supply shocks, but not necessarily so under demand shocks. We illustrate that such a result hinges on the extent to which firms can adjust along both the intensive and the extensive margins, the latter of which is often absent in the literature.