Abstract

We find that the probability of price adjustment of a product increases with its revenue. The absolute size of price adjustment decreases. We show that these facts are consistent with menu cost models where the fixed cost of adjustment does not scale with product revenue. This dependence introduces a revenue effect where the price of products with higher revenue are more likely to change and are more responsive to monetary shocks. We also document that the mean and variance of the cross-sectional log revenue distribution decreases with unemployment. Together with our earlier findings, this implies that the real effect of monetary policy is stronger in recessions than expansions. Using a quantitative menu cost model we show that output is more responsive to monetary shocks in low output states than in high output states. Lastly, we provide empirical evidence of state-dependence in monetary policy transmission.