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

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  • Sean Holly
  • Ivan Petrella
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    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 heterogeneously interconnected sectors.

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    File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0809.pdf
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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0809.

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    Handle: RePEc:san:cdmacp:0809

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    Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
    Phone: 01334 462420
    Fax: 01334 462444
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    Web page: http://www.st-andrews.ac.uk/cdma
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    Related research

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

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    15. Christopher Erceg & Luca Guerrieri & Christopher Gust, 2004. "Can long-run restrictions identify technology shocks?," International Finance Discussion Papers 792, Board of Governors of the Federal Reserve System (U.S.).
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    22. Forni, Mario & Reichlin, Lucrezia, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 453-73, July.
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    24. Susanto Basu & John G. Fernald, 1997. "Aggregate productivity and aggregate technology," International Finance Discussion Papers 593, Board of Governors of the Federal Reserve System (U.S.).
    25. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are Technology Improvements Contractionary?," NBER Working Papers 10592, National Bureau of Economic Research, Inc.
    26. Young Sik Kim & Kunhong Kim, 2006. "How Important is the Intermediate Input Channel in Explaining Sectoral Employment Comovement over the Business Cycle?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 659-682, October.
    27. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
    28. Yongsung Chang & Taeyoung Doh & Frank Schorfheide, 2006. "Non-stationary hours in a DSGE model," Working Papers 06-3, Federal Reserve Bank of Philadelphia.
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