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The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications

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  • Mr. Yuriy Gorodnichenko
  • Mr. Olivier Coibion
  • Mr. Gee Hee Hong

Abstract

We study the cyclical properties of sales, regular price changes and average prices paid by consumers ("effective" prices) in a dataset containing prices and quantities sold for numerous retailers across a variety of U.S. metropolitan areas. Both the frequency and size of sales fall when local unemployment rates rise and yet the inflation rate for effective prices paid by consumers declines significantly with higher unemployment. This discrepancy can be reconciled by consumers reallocating their expenditures across retailers, a feature of the data which we document and quantify. We propose a simple model with household shopping effort and store-switching consistent with these stylized facts and document its implications for business cycles and policymakers.

Suggested Citation

  • Mr. Yuriy Gorodnichenko & Mr. Olivier Coibion & Mr. Gee Hee Hong, 2012. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications," IMF Working Papers 2012/207, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2012/207
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    More about this item

    Keywords

    WP; posted price; price index; Sales; Price Changes; Store-Switching; Inflation Measurement; price change; shopping effort; unemployment rate; price inflation; iceberg cost; high-price store; store price rank; business cycle; prices consumer; effective price; Inflation; Consumption; Output gap; Unemployment rate; Price indexes;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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