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June 1, 2021

Central Bank Research Hub

Measuring price selection in microdata: it's not there

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Originally published on by Bank of International Settlements . Link to original report

We use microdata to estimate the strength of price selection { a key metric for the effect of monetary policy on the real economy. We propose a product-level proxy for mispricing and assess whether products with larger mispricing respond with a higher probability to identified monetary and credit shocks. We find that they do not, suggesting selection is absent. Instead, we detect state-dependent adjustment on the gross extensive margin. Our results are broadly consistent with second-generation state-dependent pricing models and sizable effects of monetary policy on the real economy.

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European Central Bank Working Papers by Peter Karadi, Raphael Schoenle and Jesse Wursten

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