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Factor demand linkages and the business cycle: Interpreting aggregate fluctuations as sectoral fluctuations

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  • Holly, S.
  • Petrella, I.

Abstract

This paper investigates the drivers of industry and aggregate fluctuations. We model the dynamics of a panel of highly disaggregated manufacturing sectors. This allows us to consider directly the linkages between sectors typical of any production system, in a framework where the sectors are fully heterogeneous. We establish that these features are fundamental for the propagation of the shocks in the aggregate economy. Aggregate fluctuations can be accounted for by small industry specific shocks. Moreover, a contemporaneous technology shock to all sectors in the economy, i.e. an aggregate technology shock, implies a positive response in both output and hours at the aggregate level. When this intersectoral channel is neglected we find a negative correlation as with much of the literature. This suggests that the standard technology driven Real Business Cycle paradigm is a reasonable approximation of a more complicated model featuring heterogenously interconnected sectors.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0827.

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Length: 24
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:cam:camdae:0827

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Sectors; Technology shocks; Business cycles; Long-run restrictions; Cross Sectional Dependence.;

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References

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Citations

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Cited by:
  1. S Holly & M Hashem Pesaran & T Yamagata, . "Spatial and Temporal Diffusion of House Prices in the UK," Discussion Papers 09/32, Department of Economics, University of York.
  2. Holly, Sean & Hashem Pesaran, M. & Yamagata, Takashi, 2011. "The spatial and temporal diffusion of house prices in the UK," Journal of Urban Economics, Elsevier, vol. 69(1), pages 2-23, January.
  3. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.

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