The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications
IMF Working Papers, August 1, 2012
Source details
- Canonical URL
- The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications
Other formats
Bibliographic details
- Authors: Olivier Coibion, Yuriy Gorodnichenko, Gee Hee Hong
- Published: August 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475505573.001
Summary and main findings
- Study of cyclical properties of sales, regular price changes, and average prices paid by consumers ("effective" prices) using a dataset of prices and quantities sold for numerous retailers across a variety of U.S. metropolitan areas.
- Both the frequency and size of sales fall when local unemployment rates rise.
- The inflation rate for effective prices paid by consumers declines significantly with higher unemployment.
- The apparent discrepancy between falling sales activity and declining effective-price inflation is reconciled by consumers reallocating their expenditures across retailers; this feature is documented and quantified in the data.
- A simple model is proposed with household shopping effort and store-switching consistent with these stylized facts; implications for business cycles and policymakers are documented.
Data features and empirical patterns
- Dataset contains prices and quantities sold for numerous retailers across a variety of U.S. metropolitan areas.
- Empirical regularities documented:
- Frequency of sales falls with higher local unemployment rates.
- Size of sales falls with higher local unemployment rates.
- Inflation rate for effective prices paid by consumers declines significantly with higher unemployment.
- Consumer behavior in the data: reallocation of expenditures across retailers (store-switching and shopping effort adjustments) is a key margin.
Model and mechanisms
- Model components emphasized:
- Household shopping effort as a choice variable.
- Store-switching behavior by consumers.
- Interaction of posted (regular) prices, sale frequency/size, and effective prices paid.
- Model is presented as simple and consistent with the documented stylized facts, linking micro pricing dynamics and consumer reallocation to macro cyclical outcomes.
Business cycle implications
- Micro-level price and quantity adjustments (sales frequency and size, store-switching) affect measured inflation through changes in effective prices paid.
- Cyclical increases in unemployment are associated with lower effective-price inflation, driven in part by consumer reallocation toward lower-priced retailers and reduced sale activity.
- These mechanisms imply that inflation dynamics during downturns reflect both supply-side price-setting behavior and demand-side shopping/retailer-choice responses.
Policy implications and considerations
- Measurement: Understanding effective-price dynamics requires accounting for consumer reallocation across retailers and the interaction of sales and posted prices.
- Monetary and fiscal policymakers should consider that observed declines in effective-price inflation during periods of higher unemployment may partly reflect changes in consumer shopping effort and store-switching, not only changes in posted price rigidity.
- Policy assessments of inflation stabilization and output gap measures should incorporate the documented micro-level price and expenditure reallocation channels.
Source: The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications (IMF Working Paper).