Sectoral vs. aggregate shocks: a structural factor analysis of industrial production

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

No 08-07, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long and Plosser (1983), produce an approximate factor model as a reduced form. A structural factor analysis then indicates that aggregate shocks continue to be the dominant source of variation in IP, but the importance of sectoral shocks more than doubles after the Great Moderation (to 30%). The increase in the relative importance of these shocks follows from a fall in the contribution of aggregate shocks to IP movements after 1984.

Keywords: Econometric models; Business cycles (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-bec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (56)

Downloads: (external link)
http://www.richmondfed.org/publications/research/working_papers/2008/wp_08-7.cfm (text/html)
https://www.richmondfed.org/-/media/RichmondFedOrg ... /2008/pdf/wp08-7.pdf Full text (application/pdf)

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: Aggregate Shocks and the Variability of Industrial Production (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedrwp:08-07

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by Christian Pascasio ().