Michael Horvath (Department of Economics, Stanford University)
Abstract
The traditional argument against the relevance of sector-specific shocks for the aggregate phenomenon of business cycles invokes the law of large numbers: positive shocks in some sectors are offset by negative shocks in other sectors. This paper hypothesizes that cancellation of sector-specific shocks via the law of large numbers is affected by interactions among producing sectors. The analysis is performed within the context of a multisector model similar in spirit to that of Long and Plosser (1983). It is shown that the rate at which the law of large numbers applies is controlled by the rate of increase in the number of full rows in the input-use matrix rather than by the rate of increases in the total number of sectors. Investigations of actual input-use matrices from the U.S. economy reveal that the number of full rows increases much slower than the total number of rows upon disaggregation and when these input-use matrices are used to parameterize the model, aggregate volatility from sector shocks declines at less than half the rate implied by the law of large numbers. This finding leaves open the possibility that a sizable portion of aggregate volatility is caused by "smaller" shocks to individual sectors. Simple statistics calculated from the model indicate that as much as 80% the volatility in U.S. gross domestic product growth rates could be the result of independent shocks to 2-digit Standard Industrial Code sectors. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.
Volume (Year): 1 (1998) Issue (Month): 4 (October) Pages: 781-808 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E1 - Macroeconomics and Monetary Economics - - General Aggregative Models E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles C67 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Input-Output Models
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995.
"Sectoral Solow Residuals,"
NBER Working Papers
5286, National Bureau of Economic Research, Inc.
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