Aggregate Shocks and the Variability of Industrial Production

Pierre Daniel Sarte, Mark Watson and Andrew Foerster

No 224, 2008 Meeting Papers from Society for Economic Dynamics

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.

Date: 2008
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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: Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production (2008)
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