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Aggregate Shocks and the Variability of Industrial Production

Author

Listed:
  • Pierre-Daniel Sarte

    (Federal Reserve Bank of Richmond)

  • Mark Watson

    (Princeton University)

  • Andrew Foerster

    (Duke University)

Abstract

Industrial production is both highly variable and correlated across sectors. This correlation arises in part from common or aggregate shocks and from sector-specific shocks that propagate across sectors via input-output linkages or other complementarities in production. Using factor analytic methods, we ask i) how much of the variability in sectoral output is associated with common shocks? ii) to what extent these common shocks capture spillovers of idiosyncratic shocks by way of input-output linkages? and iii) whether the characterization of these shocks and their contribution to the variability of industrial production has changed over time? We find that common shocks explain about 80 percent of the variability in overall industrial production both before and after the onset of the great moderation. That said, common or aggregate shocks play a much larger role in generating variations in individual sectoral output prior to the great moderation. Finally, we estimate that the propagation of sector-specific shocks by way of input-output linkages account for 5-15 percent of the variability in overall industrial production.

Suggested Citation

  • Pierre-Daniel Sarte & Mark Watson & Andrew Foerster, 2008. "Aggregate Shocks and the Variability of Industrial Production," 2008 Meeting Papers 224, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:224
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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