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.


Paging Arnold Kling.

Here's a pdf version from the University of Wisconsin web site: It's way too dense for a non-economist like me, but intuitively Atalay's findings make sense (he mentions steel as a supply shock that reverberates across sectors). My question to Cowen: what are the policy implications?

It's as if those oil embargoes never happened in the 1970s, at least for economists.

don't show this to Scott Sumner

So fracking is going to have more benefits than we originally expected?

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