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Industrial Connectedness and Business Cycle Comovements

Amy Guisinger (), Michael Owyang () and Daniel Soques ()

No 2020-052, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The effect of economic shocks on business cycles fluctuations may vary across industries. For example, shocks that originate in a single industry may propagate elsewhere, either up or down stream in the production chain. Thus, industries that are more connected may be more vulnerable to industry-specific economic shocks. However, any model of industrial connectedness must account for the fact that much of the inter-industry correlation will be driven by national shocks. In light of this, we develop a panel Markov-switching model for industry-level data that incorporates a number of features relevant for sub-national analysis. First, we model industry-level trends to differentiate between cyclical downturns and secular decline in an industry. Second, we incorporate a national-level business cycle that industries may or may not attach to. Third, we model comovement off of the national-level cycle as factors that affect clusters of industries. We find that there are industry groupings that comove because their production networks are intrasectoral and industry groupings that lack inter or intra-sectoral classification, but most industries move together.

Keywords: cluster analysis; Markov-switching (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2020-12-30
New Economics Papers: this item is included in nep-mac
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DOI: 10.20955/wp.2020.052

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Handle: RePEc:fip:fedlwp:89372