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Sales and Monetary Policy

Author

Listed:
  • Bernardo Guimaraes
  • Kevin D. Sheedy

Abstract

A striking fact about prices is the prevalence of ``sales': large temporary price cuts followed by a return exactly to the former price. This paper builds a macroeconomic model with a rationale for sales based on firms facing consumers with different price sensitivities. Even if firms can vary sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility of prices at the micro level due to sales does not translate into flexibility at the macro level.

Suggested Citation

  • Bernardo Guimaraes & Kevin D. Sheedy, 2008. "Sales and Monetary Policy," CEP Discussion Papers dp0887, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0887
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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