Price Selection in the Microdata

Peter Karadi, Raphael Schoenle and Jesse Wursten

Journal of Political Economy Macroeconomics, 2024, vol. 2, issue 2, 228 - 271

Abstract: The flexibility of the aggregate price level affects the ability of monetary policy to stabilize business cycles. Monetary policy can be ineffective even if only few prices adjust, as long as those price changes are disproportionately large and make the aggregate price level flexible. We show that the most misaligned prices change with the highest probability. Systematic selection of large price changes is absent, however, following aggregate shocks. Instead, aggregate shocks bring about a uniform shift between price increases and decreases. These results are consistent with a particular class of state-dependent pricing models and imply a sizable real impact of monetary policy.

Date: 2024
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