Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production

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

Journal of Political Economy, 2011, vol. 119, issue 1, 1 - 38

Abstract: Using factor methods, we decompose industrial production (IP) into components arising from aggregate and sector-specific shocks. An approximate factor model finds that nearly all of IP variability is associated with common factors. We then use a multisector growth model to adjust for the effects of input-output linkages in the factor analysis. Thus, a structural factor analysis indicates that the Great Moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged. Consequently, the role of idiosyncratic shocks increased considerably after the mid-1980s, explaining half of the quarterly variation in IP.

Date: 2011
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Related works:
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)
Working Paper: Aggregate Shocks and the Variability of Industrial Production (2008)
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