Shocks versus Responsiveness: What Drives Time-Varying Dispersion?

David Berger and Joseph Vavra

Journal of Political Economy, 2019, vol. 127, issue 5, 2104 - 2142

Abstract: The dispersion of many economic variables is countercyclical. What drives this fact? Greater dispersion could arise from greater volatility of shocks or from agents responding more to shocks of constant size. Without data separately measuring exogenous shocks and endogenous responses, a theoretical debate between these explanations has emerged. In this paper, we provide novel identification using price data in the open-economy environment: using confidential BLS microdata, we document a robust positive relationship between exchange rate pass-through and the dispersion of item-level price changes. We then show that this relationship supports models with time-varying responsiveness.

Date: 2019
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