Sales and Monetary Policy
69 Pages Posted: 2 Dec 2008
Date Written: August 2008
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: Suggested Citation