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Sales and Monetary Policy

  • Guimarães, Bernardo
  • Sheedy, Kevin D.

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
Date of revision:
Handle: RePEc:cpr:ceprdp:6940
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References listed on IDEAS
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  1. Emi Nakamura & Jon Steinsson, 2005. "Price Setting in a Forward-Looking Customer Market," Macroeconomics 0509010, EconWPA.
  2. 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 1121-30, December.
  3. repec:oup:qjecon:v:123:y:2008:i:4:p:1415-1464 is not listed on IDEAS
  4. repec:oup:qjecon:v:123:y:2008:i:3:p:863-904 is not listed on IDEAS
  5. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 413, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. Bernardo Guimaraes & Kevin D. Sheedy, 2011. "Sales and Monetary Policy," American Economic Review, American Economic Association, vol. 101(2), pages 844-76, April.
  8. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2008. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," Working Papers 1161, Princeton University, Department of Economics, Center for Economic Policy Studies..
  9. Tack Yun & Andrew Levin, 2011. "Reconsidering the Microeconomic Foundations of Price-Setting Behavior," 2011 Meeting Papers 424, Society for Economic Dynamics.
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