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Factor demand linkages and the business cycle: Interpreting aggregate fluctuations as sectoral fluctuations

  • Holly, S.
  • Petrella, I.

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 heterogenously interconnected sectors.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0827.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0827.

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Length: 24
Date of creation: Jun 2008
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Handle: RePEc:cam:camdae:0827
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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