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Volatility and Pass-through

  • David Berger
  • Joseph S. Vavra

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
Note: EFG IFM ME
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  1. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2014.
  2. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  3. 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.
  4. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, 03.
  5. RĂ¼diger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
  6. Ruediger Bachmann & Ricardo J. Caballero & Eduardo M.R.A. Engel, 2006. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," NBER Working Papers 12336, National Bureau of Economic Research, Inc.
  7. Anil Kashyap & Francois Gourio, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," 2007 Meeting Papers 148, Society for Economic Dynamics.
  8. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
  9. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," Econometric Society 2004 North American Summer Meetings 508, Econometric Society.
  10. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2014. "Really Uncertain Business Cycles," Working Papers 14-18, Center for Economic Studies, U.S. Census Bureau.
  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. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
  13. repec:oup:qjecon:v:129:y:2013:i:1:p:215-258 is not listed on IDEAS
  14. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  15. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  16. Joseph Vavra & David Berger, 2012. "Consumption Dynamics During the Great Recession," 2012 Meeting Papers 109, Society for Economic Dynamics.
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