Inflation, Costs of Adjustment and the Real Price Amplitude: Am Empirical Study

The menu-cost model (Sheshinski-Weiss, 1977) demonstrated that in the presence of fixed price adjustment costs, monopoly firms who face an inflationary trend in rival prices will adjust their nominal price level periodically, following an (S,s) policy in real price space. This paper tests the implications of the model on the real price amplitude and the expected frequency of price adjustments, using Israeli data. It is shown that exceptfor the lower end of the real price cycle, the theory is supported by the data.