Sectoral vs. Aggregate Shocks In The Business Cycle

• Published in: The American economic review Vol. 77; no. 2; pp. 333 - 336
• Main Authors: Long, John B., Plosser, Charles I.
• Format: Journal Article
• Language: English
• Published: Menasha, Wis The American Economic Association 01-05-1987; American Economic Association
• Subjects: Aggregate; Business cycles; Business forecasts; Business innovation; Commodities; Correlations; Economic fluctuations; Economic theory; Economics; Factor analysis; Food industries; Impacts; Industrial growth; Industrial output; Industrial production indices; Innovations; Leather industry; Real Business Cycle Theory: What Does It Explain?; Statistical analysis; Technological innovation
• ISSN: 0002-8282; 1944-7981

The comovement in commodity outputs is examined to determine the degree to which it can be characterized as resulting from a common aggregate shock or from a more diverse set of independent disturbances. If the first case is correct, the correlation matrix of output innovations will have large off-diagonal elements and will be consistent with one or 2 unobservable common factors obtained by factor analysis. If the 2nd case is correct, the matrix of innovations will not be consistent with a small number of factors. Monthly output innovations are specified by a model that includes a vector of monthly output rates, a vector of disturbances, a matrix of monthly means, and a dummy variable. Data for 13 commodity output groups from the Index of Industrial Production are used for empirical estimation. The results support the belief in a common aggregate disturbance, but its significance is not very large for most industries.