Large Currency Depreciations and Menu Costs

This paper studies the role of nominal price rigidities in accounting for low CPI inflation after large currency depreciations. Using a small open economy model with menu-cost nominal frictions calibrated to micro data from... [ view full abstract ]

This paper studies the role of nominal price rigidities in accounting for low CPI inflation after large currency depreciations. Using a small open economy model with menu-cost nominal frictions calibrated to micro data from Mexico's Consumer Price Index, I fi nd that in episodes of large depreciations, the effects of nominal rigidities in retail prices are quantitatively small and short-lived. The incomplete exchange rate pass-through to consumer prices is largely a result of a fall in real wages caused by negative real shocks and nominal stickiness in wages.