Menu costs and information rigidity: Evidence from the consumption tax hike in Japan

• Published in: Journal of macroeconomics Vol. 72; p. 103400
• Main Author: Shoji, Toshiaki
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2022
• Subjects: Consumption tax pass-through; Price stickiness; Tax-included and tax-excluded prices; Zero lower bound; E62; Tax-included and tax-excluded prices; E31; Zero lower bound; H32; Price stickiness; Consumption tax pass-through
• ISSN: 0164-0704; 1873-152X
• DOI: 10.1016/j.jmacro.2022.103400

Pre-announced consumption tax changes can provide an opportunity for firms to reset their prices, which potentially leads to an economic stimulus. To test this argument, I examine firms’ price-setting behavior in response to Japan’s consumption tax hike in 2014. I find that prices became less sticky after the tax hike, suggesting that firms paid menu costs when passing through the tax hike to their prices. Nonetheless, I find that more than half of prices remained constant on a tax-excluded basis after the tax hike. This finding suggests that another factor prevented firms from adjusting their prices, though they paid menu costs.