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Volatility and Pass-through

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  • David Berger
  • Joseph S. Vavra

Abstract

The response of inflation to nominal shocks varies across time: 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. Furthermore, we show that time-variation in price change dispersion is both large and countercyclical so that ignoring microeconomic dispersion leads to large time-varying bias when estimating pass-through. Why does pass-through vary with microeconomic dispersion? We estimate a quantitative price-setting model with various sources of heterogeneity in order to interpret our “model-free” empirical results and to better understand the economic forces that shape the response of prices to cost shocks at a moment in time. We conclude that strategic complementarities, which have received wide attention for their role in shaping average pass-through, also appear to vary dramatically across time. In contrast, we find no evidence supporting the "uncertainty" shock literature, which posits time-variation in underlying cost shocks as an explanation for time-variation in dispersion.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19651.

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Date of creation: Nov 2013
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Handle: RePEc:nbr:nberwo:19651

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References

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  1. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  2. Christian Broda & David Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  3. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Setting with Customer Retention," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
  4. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
  5. Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
  6. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
  7. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  8. Peter J. Klenow & Jonathan L. Willis, 2006. "Real rigidities and nominal price changes," Research Working Paper RWP 06-03, Federal Reserve Bank of Kansas City.
  9. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
  10. Anil Kashyap & Francois Gourio, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," 2007 Meeting Papers 148, Society for Economic Dynamics.
  11. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  12. Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  13. R?diger Bachmann & Ricardo J. Caballero & Eduardo M. R. A. Engel, 2013. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 29-67, October.
  14. Joseph Vavra & David Berger, 2012. "Consumption Dynamics During the Great Recession," 2012 Meeting Papers 109, Society for Economic Dynamics.
  15. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
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Cited by:
  1. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Setting with Customer Retention," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
  2. Joseph S. Vavra, 2014. "Time-Varying Phillips Curves," NBER Working Papers 19790, National Bureau of Economic Research, Inc.

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