Discussion Paper Details

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Title: Sales and Monetary Policy

Author(s): Bernardo Guimar„es and Kevin D. Sheedy

Publication Date: August 2008

Keyword(s): monetary policy, nominal rigidities and sales

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Guimar„es, B and Sheedy, K. 2008. 'Sales and Monetary Policy'. London, Centre for Economic Policy Research.