TFPR: Dispersion and Cyclicality

This paper studies the dispersion and cyclicality of TFPR. Recent business cycle models assume countercyclical dispersion in TFPQ based on evidence of countercyclical dispersion in TFPR, though TFPR reflects endogenous prices. An overlapping generations model with monopolistic competition and state-dependent pricing is constructed to match three key data patterns: (i) countercyclical dispersion of TFPR, (ii) countercyclical dispersion of price changes, and (iii) countercyclical frequency of price adjustment. These patterns are matched either if shocks to the dispersion of TFPQ are negatively correlated with the mean of TFPQ, or if the monetary authority responds to them by “leaning against the wind.” (JEL D24, E23, E24, E32, E51, E52)