Shocks vs. Responsiveness: What Drives Time-Varying Dispersion?
David Berger () and
Joseph Vavra ()
No 23143, NBER Working Papers from National Bureau of Economic Research, Inc
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 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 show this relationship arises naturally in models with time-varying responsiveness but is at odds with models featuring volatility shocks.
JEL-codes: E10 E3 E31 E52 F3 F31 (search for similar items in EconPapers)
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