The effects of sectoral productivity shocks on sectoral output growth in OECD countries: A new decomposition

Sectoral productivity shocks, defined as changes in the total factor productivity at the sectoral level, affect economic performance through differing mechanisms. We quantified five differing effects (direct, internal, feedback, spillovers from suppliers and from customers) of two components of the sectoral productivity shocks (common and idiosyncratic) on respective output growth. Our dynamic panel regression analysis using an unbalanced panel of thirty-seven sectors between 1996 and 2017 across twenty-two OECD countries delivers several important findings. Firstly, the five effects attached to the common productivity shocks are positively correlated with sectoral output growth. Additionally, while most empirical literature only documents the impact of productivity shocks via network connections with suppliers, our empirical results provide evidence of the spillover effects due to connections with customer sectors along the value chain. The magnitude of the spillover effects from supplier and customer sectors is the largest among the five effects. These findings provide several important policy implications.