Working Paper: NBER ID: w23143
Authors: David Berger; Joseph Vavra
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 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.
Keywords: dispersion; volatility; responsiveness; exchange rate passthrough; business cycles
JEL Codes: E10; E3; E31; E52; F3; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate passthrough (F31) | dispersion of item-level price changes (E30) |
| time-varying responsiveness (C32) | exchange rate passthrough (F31) |
| time-varying responsiveness (C32) | dispersion of item-level price changes (E30) |
| volatility shocks (E32) | exchange rate passthrough (F31) |
| volatility shocks (E32) | dispersion of item-level price changes (E30) |