Working Less and Bargain Hunting More: Macro Implications of Sales during Japan’s Lost Decades
Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the paper, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation between the two. We then construct a dynamic stochastic general equilibrium model that takes households’ decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan’s lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.
Standard New Keynesian models have often neglected temporary sales, although the frequency of sales is far higher than that of regular price changes, and hence it is not necessarily guaranteed that the assumption of sticky prices holds. Ignoring this fact is justified, however, if retailers’ decision to hold sales is independent of macroeconomic developments. If this is the case, temporary sales do not eliminate the real effect of monetary policy. In fact, Guimaraes and Sheedy (2011, hereafter GS) develop a dynamic stochastic general equilibrium (DSGE) model incorporating sales and show that the real effect of monetary policy remains largely unchanged. Empirical studies such as Kehoe and Midrigan (2010), Eichenbaum, Jaimovich, and Rebelo (2011), and Anderson et al. (2012) argue that retailers’ decision to hold a sale is actually orthogonal to changes in macroeconomic developments.