TY - JOUR
T1 - Menu costs at work
T2 - Restaurant prices and the introduction of the euro
AU - Hobijn, Bart
AU - Ravenna, Federico
AU - Tambalotti, Andrea
PY - 2006
Y1 - 2006
N2 - Restaurant prices in the euro area increased dramatically after the introduction of the euro. We show that this increase can be explained by a common menu cost model, extended to include a state-dependent decision of firms on when to adopt the new currency. Two mechanisms drive this result. First, firms concentrate otherwise staggered price increases around the changeover. Second, before the adoption of the euro, prices do not reflect the marginal cost increases expected to occur after the changeover. This "horizon effect" disappears as soon as the new currency is adopted, causing a jump in the optimal price.
AB - Restaurant prices in the euro area increased dramatically after the introduction of the euro. We show that this increase can be explained by a common menu cost model, extended to include a state-dependent decision of firms on when to adopt the new currency. Two mechanisms drive this result. First, firms concentrate otherwise staggered price increases around the changeover. Second, before the adoption of the euro, prices do not reflect the marginal cost increases expected to occur after the changeover. This "horizon effect" disappears as soon as the new currency is adopted, causing a jump in the optimal price.
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U2 - 10.1162/qjec.121.3.1103
DO - 10.1162/qjec.121.3.1103
M3 - Review article
AN - SCOPUS:33746599451
SN - 0033-5533
VL - 121
SP - 1103
EP - 1131
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
IS - 3
ER -