The Bank for International Settlements has released Working Paper No 1327 by Ko Munakata, developing a tractable state-dependent “menu cost” pricing model that adds a drift in the aggregate markup. The framework is designed to yield explicit general-equilibrium equations, including an explicit Phillips curve, while retaining key empirical features of menu cost models. The paper assumes the aggregate markup drift is persistently negative and small, consistent with moderate positive trend inflation, and analytically characterises firms’ value function and the markup distribution to make impulse-response calculations comparable in ease to representative-agent New Keynesian models. The model reproduces the observed positive correlation between inflation and the frequency of price changes and produces a Phillips curve with additional terms proportional to the level and change in real marginal cost, making inflation more responsive to productivity and monetary policy shocks. It links these results to two asymmetries induced by the negative drift: an asymmetry in firms’ pricing thresholds (policy rule) and an asymmetry in the markup distribution, and discusses how temporary violations of the monotonic-drift condition can generate non-linear inflation dynamics.
Bank for International Settlements 2026-01-27
Bank for International Settlements publishes working paper presenting a tractable menu cost model with aggregate markup drift and a more shock-sensitive Phillips curve
The Bank for International Settlements released Working Paper No 1327 by Ko Munakata, introducing a state-dependent “menu cost” pricing model with a negative drift in aggregate markup, aligning with moderate positive trend inflation. The model, featuring a Phillips curve responsive to productivity and monetary policy shocks, highlights asymmetries in pricing thresholds and markup distribution, offering insights into non-linear inflation dynamics.