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Shocks vs. Responsiveness: What Drives Time-Varying Dispersion?

Listed author(s):
  • David Berger
  • Joseph Vavra
Registered author(s):

    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.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23143.

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    Date of creation: Feb 2017
    Handle: RePEc:nbr:nberwo:23143
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    1. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
    2. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-336, March.
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    8. Burstein, Ariel & Gopinath, Gita, 2014. "International Prices and Exchange Rates," Handbook of International Economics, Elsevier.
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    12. 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.
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    19. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    20. Cosmin Ilut & Matthias Kehrig & Martin Schneider, 2014. "Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News," NBER Working Papers 20473, National Bureau of Economic Research, Inc.
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    23. Isaac Baley & Julio A. Blanco, 2016. "Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks," Working Papers 918, Barcelona Graduate School of Economics.
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