Inequality and Monetary Policy

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I document new facts about price rigidity over differently priced products, using retail scanner and consumer panel data. First, low-price brands change prices more frequently than high-price brands within the same product category. Second, demand for low-price brands has a negative correlation with household income. These facts imply that overall prices become more flexible when there are more low-income consumers who purchase more low-price brands. I build a menu-cost model with vertically differentiated products and heterogeneous consumers. The model shows that the impact of monetary policy on real output decreases when there are more low-income consumers in the economy.