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What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?

Author

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  • Christian Matthes
  • Felipe Schwartzman

Abstract

We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the \"demand\" side (monetary, household, and government consumption) account for 43 percent more of the variance of U.S. GDP growth at business cycle frequencies than identified shocks originating in the \"supply\" side (technology and energy). Furthermore, corporate financial shocks, which theory suggests propagate to large extent through demand channels, account for an amount of the variance equal to an additional 82 percent of the fraction explained by these supply shocks.

Suggested Citation

  • Christian Matthes & Felipe Schwartzman, 2019. "What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?," Working Paper 19-9, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:19-09
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    Cited by:

    1. Dimitris Korobilis, 2020. "Sign restrictions in high-dimensional vector autoregressions," Working Papers 2020_21, Business School - Economics, University of Glasgow.

    More about this item

    Keywords

    Aggregate Shocks; Sectoral Data; Bayesian Analysis; Impulse Responses;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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