Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production / Andrew T. Foerster, Pierre-Daniel G. Sarte, Mark W. Watson.

Format:

Book

Author/Creator:

Foerster, Andrew T.

Contributor:

National Bureau of Economic Research.

Sarte, Pierre-Daniel G.

Watson, Mark W.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14389.

NBER working paper series no. w14389

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Sectoral vs. Aggregate Shocks

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

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.

Notes:

Print version record

October 2008.