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Aggregate shocks or aggregate information? costly information and business cycle comovement

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Laura Veldkamp
Justin Wolfers

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Abstract

When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2006-26.

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Date of creation: 2006
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Handle: RePEc:fip:fedfwp:2006-26

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Keywords: Business cycles;

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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.:
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Cited by:
(explanations, 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.)

  1. Michael J. Lamla & Sarah M. Lein & Jan-Egbert Sturm, 2007. "News and Sectoral Comovement," Working papers 07-183, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
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