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

Bart Hobijn, Federico Ravenna and Andrea Tambalotti

No 195, Staff Reports from Federal Reserve Bank of New York

Abstract: Restaurant prices in the euro area saw an unprecedented increase after the introduction of the euro. We use an extension of commonly used models of sticky prices and argue that the increase in restaurant prices can be explained by menu costs. The extension we use involves the state-dependent decision of firms about when to adopt the euro. Two main mechanisms drive the result. First, our model concentrates otherwise staggered price increases around the introduction of the euro. Second, before the adoption of the euro, prices do not reflect marginal cost increases expected to occur after the changeover. This horizon effect disappears as soon as the new currency is adopted, contributing to a jump in prices at that time. For realistic parameter values, the model generates a blip in inflation of the same magnitude observed in the data.

Keywords: European Union countries; Food industry and trade; Food prices; Euro (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mon
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Related works:
Journal Article: Menu Costs at Work: Restaurant Prices and the Introduction of the Euro (2006)
Working Paper: Menu Costs at Work: Restaurant Prices and the Introduction of the Euro (2005)
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