What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?

We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the \"demand\" side (monetary, household, and government consumption) account for 43 percent more of the variance of U.S. GDP growth at business cycle frequencies than identified shocks originating in the \"supply\" side (technology and energy). Furthermore, corporate financial shocks, which theory suggests propagate to large extent through demand channels, account for an amount of the variance equal to an additional 82 percent of the fraction explained by these supply shocks.