NBER Working Papers by Joseph S. Vavra

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Working Papers

May 2014Consumption Dynamics During Recessions
with David Berger: w20175
Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in ...
January 2014Time-Varying Phillips Curves
A growing theoretical literature argues that aggregate price flexibility and the inflation-output tradeoff faced by central banks should rise with microeconomic price change dispersion. However, there is little empirical work testing this prediction. I fill this gap by estimating time-varying forward looking New-Keynesian Phillips Curves (NKPC). I reject a NKPC with constant inflation-output tradeoff in favor of a slope that increases with microeconomic volatility. In contrast, there is no evidence that the inflation-output tradeoff varies with aggregate volatility or the business cycle more generally. Furthermore, I show that greater volatility does not affect price flexibility purely through increases in frequency.
November 2013Volatility and Pass-through
with David Berger: w19651
Time-variation in microdata matters empirically for aggregate dynamics: using confidential BLS data we document a robust positive relationship between aggregate exchange rate pass-through and the dispersion of item-level price changes. Furthermore, we find large time-variation in microeconomic dispersion. Ignoring this variation causes huge, time-varying bias when estimating pass-through. For example, constant pass-through specifications are overstated by 50 percent during the mid-1990s and understated by 200 percent during the 2008 trade-collapse. This purely empirical result arises naturally if items differ in their "responsiveness" to cost shocks. More responsive items should have greater price change dispersion and pass-through. We formally estimate price-setting models with alternati...
June 2013Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation
Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this paper, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with "volatility shocks" and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply output responds less to nominal stimulus during times of high volatility. Furthermore, since volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a ti...

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