Menu costs at work: Restaurant prices and the introduction of the euro

Bart Hobijn, Federico Ravenna, Andrea Tambalotti

Research output: Contribution to journalReview article

32 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1103-1131
Number of pages29
JournalQuarterly Journal of Economics
Volume121
Issue number3
DOIs
StatePublished - 2006

ASJC Scopus subject areas

  • Economics and Econometrics

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