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Sales and Monetary Policy

Author

Listed:
  • Kevin Sheedy

    (London School of Economics)

  • Bernardo Guimaraes

    (London School of Economics)

Abstract

A striking fact about prices is the prevalence of "sales": large temporary price cuts followed by prices returning exactly to their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing consumers with different price sensitivities. Even if firms can adjust 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 seen in individual prices due to sales does not translate into flexibility of the aggregate price level.

Suggested Citation

  • Kevin Sheedy & Bernardo Guimaraes, 2009. "Sales and Monetary Policy," 2009 Meeting Papers 365, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:365
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    More about this item

    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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