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How Important Are Sectoral Shocks?

I quantify the contribution of sectoral shocks to fluctuations in aggregate output. I develop a multi-industry general equilibrium model, in which each industry employs the material and capital goods produced by other sectors, and then estimate this model using data on industries' output and input choices. MLE estimates of the model yield the following findings: First, the potency of industry-specific shocks is sensitive to the ease with which industries can substitute between purchased intermediate inputs and other factors of production. Second, this elasticity of substitution is 0:15, substantially less than assumed in previous calibrations of multi-industry models. In combination, these results indicate that sectoral shocks are more important than previously suggested: these shocks are responsible for over 70% of the variation in aggregate output growth.

Enghin Atalay, University of Chicago
Publication Date: 
July, 2013
BFI Initiative: