Digitalization, retail trade and monetary policy

We study the role of digital transformation in the retail trade sector for the effectiveness of monetary policy. With the emergence of online retail trade, dynamic pricing concepts were introduced which reduced menu costs and rendered price changes more frequent. Our two-sector New Keynesian model implies that the real effects of monetary policy abate as the share of online retail trade rises. These theoretical results are empirically confirmed by means of an interactive Bayesian VAR model using data for the Euro area. Our findings identify a structural rather than a cyclical phenomenon for diminished monetary policy effectiveness.