Intermediate inputs and sectoral comovement in the business cycle

Abstract

The postwar U.S. business cycle is characterized by positive comovement of employment and output across sectors. It has been argued that multi-sector growth models are inconsistent with this observation when changes in relative productivities are the main source of uctuations. We suggest that the input-output structure of an economy, in particular the pervasive use of intermediate inputs, can induce positive comovement in sectoral employment and output following changes in relative productivities. We calibrate a model of the U.S. economy for the durable and nondurable goods producing sectors, and show that sectoral employment and output move together if intermediate inputs are used in production. The model is also consistent with the observation that the relative price of nondurable goods is procyclical.

How important is the intermediate input channel in explaining sectoral employment comovement over the business cycle?

“…Although these findings are qualitatively similar to those in Hornstein and Praschnik (1997), the sectoral comovement in employment depends crucially on the indivisiblelabor specification of preferences. With divisible labor or leisure-smoothing in the sense that consumers prefer a less variable leisure, a given sector's hours worked are negatively related to those in the other sectors.…”

“…In order to examine the significance of the intermediate-goods linkages in the business cycle comovement, we first generalize Hornstein and Praschnik (1997)'s two-sector dynamic stochastic general equilibrium model to 36 sectors at the 2-digit SIC level of disaggregation whose sectoral linkages are calibrated to the intermediate input-use and the capital-use tables.…”

“…In Hornstein and Praschnik (1997), the set of nondurable-and durable-goods sectors are respectively aggregated to a single sector each, which reduces the above specifications even further. That is, …”

“…Motivated by the observation that some of the output of the nondurable goods sector is also used as intermediate goods in the production of durable (investment) goods, Hornstein and Praschnik (1997) modify a standard real business cycle model to accommodate this "intermediate goods channel" of the economy. During a boom, this has the effect of increasing the value of output in the nondurable (or consumption) sector with the increased need for its output for use in the investment sector.…”

“…In order to examine the significance of the disaggregation level in Hornstein and Praschnik (1997) (which assume only two sectors, nondurable and durable), we first examine an indivisible-labor version of Horvath (2000) calibrated to the 2-digit SIC level (e.g. 36 sectors) of the intermediate input-use and the capital-use tables.…”