Quality, price stickiness, and monetary policy

Abstract

The low-price, low-quality brands change prices more frequently than the high-price, high-quality brands within the same product category. The greater price rigidity for high-quality brands leads to asymmetric effects of monetary policy on the rich and the poor. For instance, monetary policy shocks have larger real effects on high-income consumers who purchase more high-quality brands. This means that the rich benefit more from expansionary monetary shocks but suffer more from contractionary shocks than the poor. I build a menu-cost model with vertically differentiated products. The model predicts that monetary policy shocks have an approximately four times larger impact on the consumption of high-quality brands.