HETEROGENEOUS DYNAMICS, AGGREGATION, AND THE PERSISTENCE OF ECONOMIC SHOCKS

Abstract

Estimates of shock persistence based on disaggregate or on aggregate data are frequently very different. This article takes a step toward reconciling this apparent disconnect between micro‐ and macro‐based estimates of shock response. It is shown that, although the average of the individual impulse response functions (IRFs) is identical to the aggregate IRF, averages of other popular persistence measures, such as the sum of the autoregressive coefficients among others, tend to be larger the higher the aggregation level. The theoretical results are illustrated with two applications that use U.S. and European inflation data.