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Sales and Monetary Policy

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Listed author(s):
  • Guimarães, Bernardo
  • Sheedy, Kevin D.

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6940.

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Date of creation: Aug 2008
Handle: RePEc:cpr:ceprdp:6940
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Keywords: monetary policy; nominal rigidities; sales;

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Find related papers by 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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  1. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 863-904.
  2. Bernardo Guimaraes & Kevin D. Sheedy, 2011. "Sales and Monetary Policy," American Economic Review, American Economic Association, vol. 101(2), pages 844-876, April.
  3. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
  4. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers 625, Society for Economic Dynamics.
  5. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-1130, December.
  6. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 661, Federal Reserve Bank of Minneapolis.
  7. Joel Sobel, 1984. "The Timing of Sales," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 353-368.
  8. Tack Yun & Andrew Levin, 2009. "Reconsidering the Microeconomic Foundations of Price-Setting Behavior," 2009 Meeting Papers 798, Society for Economic Dynamics.
  9. Emi Nakamura & Jon Steinsson, 2005. "Price Setting in a Forward-Looking Customer Market," Macroeconomics 0509010, EconWPA.
  10. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
  11. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
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