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

  • Sean Holly
  • Ivan Petrella
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    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 heterogeneously interconnected sectors.

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    File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0809.pdf
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    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0809.

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    Handle: RePEc:san:cdmacp:0809
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    Department of Economics, University of St. Andrews, Fife KY16 9AL

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    3. Yongsung Chang & Jay H. Hong, 2005. "Do technological improvements in the manufacturing sector raise or lower employment?," Working Paper 05-02, Federal Reserve Bank of Richmond.
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    7. Jovanovic, Boyan, 1986. "Micro Shocks and Aggregate Risks," Working Papers 86-14, C.V. Starr Center for Applied Economics, New York University.
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    24. Shea, John S, 2002. "Complementarities and Comovements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 412-33, May.
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    26. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
    27. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
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    29. Timothy G. Conley & Bill Dupor, 2003. "A Spatial Analysis of Sectoral Complementarity," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 311-352, April.
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