TY  - JOUR
AU  - Foerster,Andrew T.
AU  - Sarte,Pierre-Daniel G.
AU  - Watson,Mark W.
TI  - Sectoral vs. Aggregate Shocks: A Structural Factor Analysis of Industrial Production
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14389
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14389
L1  - http://www.nber.org/papers/w14389.pdf
N1  - Author contact info:
Andrew Foerster
Research Department
Federal Reserve Bank of Kansas City
1 Memorial Drive
Kansas City, MO 64198 
Tel: 816-881-2751
E-Mail: andrew.foerster@kc.frb.org

Pierre-Daniel Sarte
Research Department.
Federal Reserve Bank of Richmond
PO Box 27622
Richmond, VA  23261
Tel: 804-697-8210
Fax: 804-697-8255
E-Mail: pierre.sarte@rich.frb.org

Mark W. Watson
Department of Economics
Princeton University
Princeton, NJ 08544-1013
Tel: 609/258-4811
Fax: 609/258-5533
E-Mail: mwatson@princeton.edu
AB  - 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.
ER  -