Abstract:
We test the menu cost model of Ball and Mankiw (1994, 1995) on data from the inflation and deflation periods in Japan and Hong Kong. We calculate the moments of the distribution of price changes using a random split procedure to overcome the bias noted by Cecchetti and Bryan (1999). The key implication of the model, that the parameter on skewness is positive during both inflation and deflation, is strongly supported. The data are less clear on, but does not reject, the hypothesis that the parameter on the standard deviation changes sign between inflation and deflation periods.