Sales and Monetary Policy

69 Pages Posted: 2 Dec 2008

See all articles by Bernardo Guimarães

Bernardo Guimarães

London School of Economics & Political Science (LSE) - Department of Economics

Kevin Daniel Sheedy

London School of Economics

Date Written: August 2008

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 if firms 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 Classification: E3, E5

Suggested Citation

Guimarães, Bernardo and Sheedy, Kevin Daniel, Sales and Monetary Policy (August 2008). Available at SSRN: https://ssrn.com/abstract=1307530

Bernardo Guimarães (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 7502 (Phone)

HOME PAGE: http://personal.lse.ac.uk/guimarae

Kevin Daniel Sheedy

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 207 107 5022 (Phone)
+44 207 955 6592 (Fax)

HOME PAGE: http://personal.lse.ac.uk/sheedy/

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