How important are sectoral shocks?

Enghin Atalay has a piece on that topic in the American Economic Journal: Macroeconomics, here is the abstract with emphasis added by me:

I quantify the contribution of sectoral shocks to business cycle fluctuations in aggregate output. I develop and estimate a multi-industry general equilibrium model in which each industry employs the material and capital goods produced by other sectors. Using data on US industries’ input prices and input choices,I find that the goods produced by different industries are complements to one another as inputs in downstream industries’ production functions. These complementarities indicate that industry-specific shocks are substantially more important than previously thought, accounting for at least half of aggregate volatility.

There is another recent paper, this one by Ernesto Pasten, Raphael Schoenle, and Michael Weber, an NBER Working Paper.  From p.3:

…heterogeneity in price rigidities changes the identity of sectors from which aggregate fluctuations originate, and generates GDP volatility from sectoral shocks independent of the sector-size distribution and network centrality.

In other words, sector-specific shocks are underrated as causes of aggregate fluctuations, most of all in the economic blogosphere.


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