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Do product returns in the retail sector affect the price level? Evidence from the equation of exchange

Author

Listed:
  • Edoardo Beretta

    (University of Lugano)

  • Doris Neuberger

    (University of Rostock)

  • Richard Senner

    (European Central Bank)

Abstract

Starting from Irving Fisher’s equation of exchange ( $$MV=PT$$ M V = P T ) at the basis of the quantity theory of money and mainstream (macro)economics linking money ( $$M$$ M ) and its frequency of circulation ( $$V$$ V ) on the one hand to the general price level ( $$P$$ P ) and real goods and services exchanged ( $$T$$ T ) on the other, we analyze whether product returns by consumers (reaching 16.5% of total US sales in 2022) affect macroeconomic variables such as the price level and the velocity of money. We explore two different product-return scenarios: (1) reselling, and (2) destroying returned items. Based on a theoretical analysis and data for the US, we find that reselling product returns at a discount price reduces the price level, which is however not taken into account in the statistical measurement of the consumer price index. Moreover, the “modern” equation of exchange used in mainstream macroeconomics is an unsuitable instrument to study the effects of product returns on money velocity, because it neglects non-GDP-relevant transactions such as returning and reselling products. This leads to underestimate the actual velocity of money.

Suggested Citation

  • Edoardo Beretta & Doris Neuberger & Richard Senner, 2023. "Do product returns in the retail sector affect the price level? Evidence from the equation of exchange," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(3), pages 499-513, December.
    • Handle: RePEc:spr:eurase:v:13:y:2023:i:3:d:10.1007_s40822-023-00239-7
    DOI: 10.1007/s40822-023-00239-7
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