Volatility and Pass-Through

56 Pages Posted: 16 Nov 2013

See all articles by David Berger

David Berger

Northwestern University

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: November 2013

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.

Suggested Citation

Berger, David and Vavra, Joseph, Volatility and Pass-Through (November 2013). NBER Working Paper No. w19651. Available at SSRN: https://ssrn.com/abstract=2355657

David Berger (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Joseph Vavra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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