On the Importance of Sales for Aggregate Price Flexibility

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.