Working Paper: CEPR ID: DP3746
Authors: Fabio Canova; Evi Pappa
Abstract: We study the effect of regional expenditure and revenue shocks on price dispersion in a monetary union using annual US state and quarterly EU data. We identify fiscal shocks using sign restrictions on the dynamics of expenditures, revenues, deficits and output. We construct two estimates for structural price dispersion dynamics, one for the average and one for each unit, which optimally weight the information contained in the data for all units. We find that fiscal shocks explain between 10-20% of the variability of price dispersion in the US and between 3-4% in the EU. On average, the predictions of standard theory are confirmed: expansionary fiscal disturbances produce positive price dispersion responses in both areas while distortionary balance budget shocks produce negative price responses. In about one third of the units, negative price dispersion responses to expansionary fiscal shocks are observed. Further, heterogeneities in shapes and peak responses are observed. Explanations for the puzzling features are provided.
Keywords: Bayesian techniques; fiscal policy; price dispersions; supply effects
JEL Codes: C50; E30; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal shocks (H39) | Price dispersion (L11) |
| Expansionary fiscal disturbances (bond creation) (E62) | Price dispersion (L11) |
| Balance budget shocks (distortionary taxation) (H31) | Price dispersion (L11) |
| Expansionary fiscal shocks (E62) | Local price dispersion (P22) |