NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Andrew Foerster

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October 2008Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production
with Pierre-Daniel G. Sarte, Mark W. Watson: w14389
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 th...

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