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American Economic Review: Vol. 101 No. 2 (April 2011)

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Sales and Monetary Policy

Article Citation

Guimaraes, Bernardo, and Kevin D. Sheedy. 2011. "Sales and Monetary Policy." American Economic Review, 101(2): 844-76.

DOI: 10.1257/aer.101.2.844

Abstract

A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by prices returning to exactly their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust 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 seen in individual prices due to sales does not translate into flexibility of the aggregate price level. (JEL E13, E31, E52, L11, L25, L81, M31)

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Authors

Guimaraes, Bernardo (London School of Economics and Political Science)
Sheedy, Kevin D. (London School of Economics and Political Science)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E31: Price Level; Inflation; Deflation
E52: Monetary Policy
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L25: Firm Performance: Size, Diversification, and Scope
L81: Retail and Wholesale Trade; e-Commerce
M31: Marketing


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