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Sales and monetary policy

By Bernardo Guimaraes and 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 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

Topics: HB Economic Theory
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2008
OAI identifier: oai:eprints.lse.ac.uk:25492
Provided by: LSE Research Online
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