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

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Date of creation: Sep 2008
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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
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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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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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