Working Paper: NBER ID: w19651
Authors: David Berger; Joseph S. Vavra
Abstract: What drives countercyclical volatility? A large literature has documented that many economic variables are more disperse in recessions, but this could either occur because shocks get bigger or because firms respond more to shocks which are the same size. Existing evidence that the dispersion of endogenous variables rises in recessions cannot tell us which of volatility or responsiveness is getting bigger, and these two explanations have very different policy implications. However, we document new facts in the open economy environment and show that they can be used to disentangle these explanations. In particular, we use confidential BLS micro data to show that there is a robust positive relationship between exchange rate pass-through and the dispersion of item-level price changes. We then argue that changes in responsiveness can explain this fact while volatility shocks cannot.
Keywords: volatility; passthrough; exchange rate; price changes
JEL Codes: E10; E30; E31; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| volatility shocks (E32) | dispersion of item-level price changes (E30) |
| exchange rate passthrough (F31) | dispersion of item-level price changes (E30) |
| dispersion of item-level price changes (E30) | exchange rate passthrough (F31) |
| exchange rate passthrough (F31) | responsiveness changes (O30) |
| responsiveness changes (O30) | dispersion of item-level price changes (E30) |