Menu Costs at Work: Restaurant Prices and the Introduction of the Euro

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  • 1 January 2005
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      • Published in RePEc
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. (This abstract was borrowed from another version of this item.)
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