Dispersion Over the Business Cycle: Passthrough, Productivity, and Demand

We characterise the cyclical dispersion of firm-level (physical) productivity and demand shocks using Swedish microdata. Demand shock dispersion increases by more than productivity shock dispersion in recessions and explains most of the variation in sales growth dispersion. Productivity shocks pass through incompletely to prices and hence have a limited effect on sales dispersion. We directly estimate demand curves and reject the constant elasticity of substitution (CES) benchmark. We incorporate our non-CES demand curves into a heterogeneous-firm model, show it matches these micro facts, and study its implications for uncertainty shocks. Demand shock dispersion has unambiguously negative effects on output via a “wait and see channel”, while productivity shock dispersion instead affects output negatively by inducing markup dispersion.