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On the Importance of Sales for Aggregate Price Flexibility

Author

Listed:
  • Nicolas Vincent

    (HEC Montréal)

  • Oleksiy Kryvtsov

    (Bank of Canada)

Abstract

Macroeconomists traditionally ignore temporary price mark-downs ("sales") under the assumption that they are unrelated to aggregate phenomena. We challenge this view. First, we provide evidence from the U.K. and U.S. CPI micro data that the frequency of sales is strongly countercyclical. Second, we build a general equilibrium model in which sales arise endogenously. In response to a monetary contraction, firms facing rigid regular prices post more sales, and households search more intensively. The resulting fall in the aggregate price level can be significantly larger than if sales were ignored, implying a much smaller response of real consumption to monetary shocks.

Suggested Citation

  • Nicolas Vincent & Oleksiy Kryvtsov, 2015. "On the Importance of Sales for Aggregate Price Flexibility," 2015 Meeting Papers 46, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:46
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    File URL: https://economicdynamics.org/meetpapers/2015/paper_46.pdf
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    References listed on IDEAS

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    12. Baumgartner, Josef & Glatzer, Ernst & Rumler, Fabio & Stiglbauer, Alfred, 2005. "How frequently do consumer prices change in Austria? Evidence from micro CPI data," Working Paper Series 523, European Central Bank.
    13. Olivier Coibion & Yuriy Gorodnichenko & Gee Hee Hong, 2015. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications," American Economic Review, American Economic Association, vol. 105(3), pages 993-1029, March.
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    Cited by:

    1. Kochen Federico, 2016. "Price-Setting in Mexico and the Real Effects of Monetary Shocks," Working Papers 2016-21, Banco de México.

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