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Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks

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  • Michael Horvath

    (Stanford University)

Abstract

The traditional argument against the relevance of sector-specific shocks for the aggregate phenomenon of business cycles invokes the law of large numbers: positive shocks in some sectors are offset by negative shocks in other sectors. This paper hypothesizes that cancellation of sector-specific shocks via the law of large numbers is affected by interactions among producing sectors. The analysis is performed within the context of a multisector model similar in spirit to that of Long and Plosser (1983). It is shown that the rate at which the law of large numbers applies is controlled by the rate of increase in the number of full rows in the input-use matrix rather than by the rate of increases in the total number of sectors. Investigations of actual input-use matrices from the U.S. economy reveal that the number of full rows increases much slower than the total number of rows upon disaggregation and when these input-use matrices are used to parameterize the model, aggregate volatility from sector shocks declines at less than half the rate implied by the law of large numbers. This finding leaves open the possibility that a sizable portion of aggregate volatility is caused by "smaller" shocks to individual sectors. Simple statistics calculated from the model indicate that as much as 80% the volatility in U.S. gross domestic product growth rates could be the result of independent shocks to 2-digit Standard Industrial Code sectors. (Copyright: Elsevier)

Suggested Citation

  • Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
  • Handle: RePEc:red:issued:v:1:y:1998:i:4:p:781-808
    DOI: 10.1006/redy.1998.0028
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models

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