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

Sean Holly and Ivan Petrella

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: 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 heterogenously interconnected sectors.

Keywords: Sectors; Technology shocks; Business cycles; Long-run restrictions; Cross Sectional Dependence. (search for similar items in EconPapers)
JEL-codes: C31 C51 E20 E32 (search for similar items in EconPapers)
Pages: 24
Date: 2008-06
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Factor demand linkages and the business cycle: interpreting aggregate fluctuations as sectoral fluctuations (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0827

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