In a continuous-time model of the firm, menu costs imply immediate and full price adjustment as the menu costs become negligible relative to the present value of profits lost from no-adjustment- Appending convex price-adjustment costs, however, causes both types of costs to reinforce each other since quick adjustment is costly due to the convex component while slow adjustment is costly due to the menu cost component, as this cost is incurred throughout the adjustment period. We find that optimal firm behavior implies slow price adjustment which is incomplete in the long run, even in response to a large initial shock.
|Pages (from-to)||269 - 277|
|Number of pages||9|
|Journal||Journal of Economics Research|
|Publication status||Published - 1997|