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Aggregate fluctuations and the industry structure of the US economy

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  • Caunedo, Julieta

Abstract

In a two-sector economy, changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment-specific and neutral shocks. I document that the cost shares of intermediate inputs produced by the investment sector correlate positively with GDP, whereas those of inputs produced by the consumption sector correlate negatively with GDP. The two-sector model of Greenwood et al. (1988) is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors. Shock amplification — that is, the effect of a sectorial shock on aggregate value added — depends on the degree of heterogeneity in these elasticities of substitution. For a calibrated economy to that of the United States, I find that shock amplification is stronger than in a unitary elasticity economy. It is also stronger than in an economy with a common non-unitary elasticity that is either inferred from data via reduced-form estimates, or calibrated to match the same targets as our benchmark economy.

Suggested Citation

  • Caunedo, Julieta, 2020. "Aggregate fluctuations and the industry structure of the US economy," European Economic Review, Elsevier, vol. 129(C).
  • Handle: RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301975
    DOI: 10.1016/j.euroecorev.2020.103567
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    More about this item

    Keywords

    Investment-specific shocks; Intermediate inputs; Heterogeneous elasticities of substitution;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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