On the Importance of Sales for Aggregate Price Flexibility

Nicolas Vincent and Oleksiy Kryvtsov

No 46, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Macroeconomists traditionally ignore temporary price mark-downs ("sales") under the assumption that they are unrelated to aggregate phenomena. We challenge this view. First, we provide evidence from the U.K. and U.S. CPI micro data that the frequency of sales is strongly countercyclical. Second, we build a general equilibrium model in which sales arise endogenously. In response to a monetary contraction, firms facing rigid regular prices post more sales, and households search more intensively. The resulting fall in the aggregate price level can be significantly larger than if sales were ignored, implying a much smaller response of real consumption to monetary shocks.

Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Working Paper: On the Importance of Sales for Aggregate Price Flexibility (2014)
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