Working Paper: CEPR ID: DP6940
Authors: Bernardo Guimares; Kevin D. Sheedy
Abstract: 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 iffirms 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.
Keywords: monetary policy; nominal rigidities; sales
JEL Codes: E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Real effects on the economy (F69) |
| Sticky normal prices (P22) | Larger real effects of monetary policy shocks (E39) |
| Sales decisions as strategic substitutes (L14) | Reduced overall responsiveness of price level to monetary shocks (E39) |
| Expansionary monetary shock (E49) | Decrease in sales (D49) |
| Decrease in sales (D49) | Higher average price (D49) |
| Higher average price (D49) | Less pronounced aggregate price level adjustment (E30) |
| Monetary policy in model with sticky normal price and flexible sales (C54) | Similar real effects to model with single sticky price (C54) |
| Unanticipated change in money supply (E51) | Elasticity of output of approximately 0.9 (E23) |
| Unanticipated change in money supply (E51) | Elasticity of price level around 0.1 (E31) |