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Factor Demand Linkages, Technology Shocks, and the Business Cycle

  • Sean Holly

    (University of Cambridge and Centre for International Macroeconomics and Finance)

  • Ivan Petrella

    (Birkbeck College, University of London)

This paper argues that factor demand linkages can be important for the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise there is a negative correlation, as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of the business cycle. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 94 (2012)
Issue (Month): 4 (November)
Pages: 948-963

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Handle: RePEc:tpr:restat:v:94:y:2012:i:4:p:948-963
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