Sectoral versus aggregate shocks: A structural factor analysis of industrial production

Andrew T. Foerster, Pierre Daniel G. Sarte, Mark W. Watson

Research output: Contribution to journalArticle

102 Scopus citations

Abstract

Using factor methods, we decompose industrial production (IP) into components arising from aggregate and sector-specific shocks. An approximate factor model finds that nearly all of IP variability is associated with common factors. We then use a multisector growth model to adjust for the effects of input-output linkages in the factor analysis. Thus, a structural factor analysis indicates that the Great Moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged. Consequently, the role of idiosyncratic shocks increased considerably after the mid-1980s, explaining half of the quarterly variation in IP.

Original languageEnglish (US)
Pages (from-to)1-38
Number of pages38
JournalJournal of Political Economy
Volume119
Issue number1
DOIs
StatePublished - Feb 1 2011

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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