Aggregate fluctuations and the industry structure of the US economy

Julieta Caunedo

European Economic Review, 2020, vol. 129, issue C

Abstract: In a two-sector economy, changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment-specific and neutral shocks. I document that the cost shares of intermediate inputs produced by the investment sector correlate positively with GDP, whereas those of inputs produced by the consumption sector correlate negatively with GDP. The two-sector model of Greenwood et al. (1988) is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors. Shock amplification — that is, the effect of a sectorial shock on aggregate value added — depends on the degree of heterogeneity in these elasticities of substitution. For a calibrated economy to that of the United States, I find that shock amplification is stronger than in a unitary elasticity economy. It is also stronger than in an economy with a common non-unitary elasticity that is either inferred from data via reduced-form estimates, or calibrated to match the same targets as our benchmark economy.

Keywords: Investment-specific shocks; Intermediate inputs; Heterogeneous elasticities of substitution (search for similar items in EconPapers)
JEL-codes: E22 E23 E32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Aggregate Fluctuations and the Industry Structure of the US Economy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301975

DOI: 10.1016/j.euroecorev.2020.103567

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