Relative prices and aggregate shocks
Lee, Joo Young
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This dissertation studies the effect of aggregate shocks on the relative prices across the industries. It focuses on identifying the dynamic response of the distribution of relative prices to money supply shocks and productivity shocks. Focusing on the effects of aggregate shocks on the distribution of relative prices enables us to sort out the sources of observed correlation between this distribution and aggregate variables, free from the implicit causal relationship assumed in most of the literature. First study revisits the study by Hercowitz (1981), with VAR model to identify money supply shocks with long-run neutrality. It provides better estimates of money supply shocks than Hercowitz’s ad hoc methods. Second study estimates the response of the entire distribution of relative prices to exogenous money supply and productivity shocks. Relative dispersion and cross-sectional skewness are computed from this distribution of responses. The empirical results on the relationship between inflation and the sample moments are consistent with those from most of the literature, and the responses of sample moments to aggregate shocks provide new implication to explain the behavior of relative prices to aggregate shocks.