We thank Miklos Koren, Dan Tatar, and David Sacks for many helpful discussions. We also thank Marco Gonzales-Navarro, Gilles Duranton, and seminar participants at Yonsei University for their comments. Finally, we thank Brian Minton and Kevin Bryan for outstanding research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
T his paperis basedonchapt er3ofmyP h.D .disser t at ionwrit t enatt heU niver sit yofR ochest er. I w oul d l ike t o t hank Sergio R ebel o, John H. B oyd III, as w el las T homas Cool ey f ort heirguidance and const ant encour agement. I w oul d al so l ike t o t hank N or man L oayza, D arr en Fil son, M art in G er vais, P er Krusel l , V assil ios P atikis, Jor ge Soar es, A l ex W ol man, as w el las seminarpart icipant s atA r izona St at e U niver sit y, t he U niver sit y ofG eor gia, l 'U niver sit éL aval , t he U niver sit y of M iami, t he W orl d B ank, and t he Federal R eser veB ankofR ichmond f orhel pf ulcomment s. Final l y, I am indebt ed t oR obertKingand an anonymous r ef er ee f ort heirsuggest ions. A l ler r or s ar e my o wn. y T he views expressed in t his paperare sol el y t hose oft he aut horand donotnecessar il y repr esentt hose oft he FederalR eserve B ank ofR ichmond ort he Feder alR eser ve System.
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.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.