Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production

Andrew Foerster, Pierre-Daniel G. Sarte and Mark Watson

No 14389, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long and Plosser (1983), produce an approximate factor model as a reduced form. A structural factor analysis then indicates that aggregate shocks continue to be the dominant source of variation in IP, but the importance of sectoral shocks more than doubles after the Great Moderation (to 30%). The increase in the relative importance of these shocks follows from a fall in the contribution of aggregate shocks to IP movements after 1984.

JEL-codes: C32 E23 E32 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-bec and nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (22)

Published as Sectoral vs. Aggregregate Shocks: A Structural Factor Analysis of Industrial Production (with Andrew Foerster and Pierre-Danieal Sarte) Journal of Political Economy, Vol. 119, No. 1 (February 2011), pp 1-38

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Related works:
Journal Article: Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production (2011)
Working Paper: Sectoral vs. aggregate shocks: a structural factor analysis of industrial production (2008)
Working Paper: Aggregate Shocks and the Variability of Industrial Production (2008)
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