NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production

Andrew T. Foerster, Pierre-Daniel G. Sarte, Mark W. Watson

NBER Working Paper No. 14389
Issued in October 2008
NBER Program(s):   EFG   ME

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.

download in pdf format
   (364 K)

email paper

This paper is available as PDF (364 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Sectoral vs. Aggregregate Shocks: A Structural Factor Analysis of Industrial Production (with Andrew Foerster and Pierre-Danieal Sarte) Journal of Political Economy, Vol. 119, No. 1 (February 2011), pp 1-38

Users who downloaded this paper also downloaded these:
Beyer, Farmer, Henry, and Marcellino w13404 Factor Analysis in a Model with Rational Expectations
Gabaix w15286 The Granular Origins of Aggregate Fluctuations
Ludvigson and Ng w15188 A Factor Analysis of Bond Risk Premia
Jones w16742 Misallocation, Economic Growth, and Input-Output Economics
Carvalho and Gabaix w16424 The Great Diversification and its Undoing
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us