Virgiliu Midrigan

Menu Costs, Multi-Product Firms, and Aggregate Fluctuations

I employ a large set of scanner price data collected in retail stores and document that (i) although the average magnitude of price changes is large, a substantial number of price changes are small in absolute value; (ii) the distribution of non-zero price changes has fat tails; and (iii) stores tend to adjust prices of goods in narrow product categories simultaneously. I extend the standard menu costs model to a multi-product setting in which firms face economies of scale in the technology of adjusting prices. The model, because of its ability to replicate this additional set of micro-economic facts, can generate aggregate fluctuations much larger than those in standard menu costs economies.

Household Leverage and the Recession

We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Inventories, Lumpy Trade, and Large Devaluations

Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the models predictions.

US Trade and Inventory Dynamics

The authors examine the source of the large fall and rebound in U.S. trade in the recent recession. While trade fell and rebounded more than expenditures or production of traded goods, they find that relative to the magnitude of the downturn, these trade fluctuations were in line with those in previous business cycle fluctuations. The authors argue that the high volatility of trade is attributed to more severe inventory management considerations of firms involved in international trade. They present empirical evidence for autos as well as at the aggregate level that the adjustment of inventory holdings helps explain these fluctuations in trade.

Is Firm Pricing State or Time Dependent? Evidence from U.S. Manufacturing

If pricing is state dependent, firms are more likely to adjust whenever aggregate and idiosyncratic shocks reinforce each other and trigger desired price changes in the same direction. Using measures of technology shocks derived from production function estimates for four-digit U.S. manufacturing industries, I find that sectoral inflation rates are more sensitive to negative, as opposed to positive, technology disturbances in periods of higher economy-wide inflation, commodity price increases, and expansionary monetary policy shocks. I argue, using a state-dependent sticky price model that matches salient features of the U.S. microprice data, that these results suggest that pricing is state-dependent in U.S. manufacturing.