Input-Output Linkages and Sectoral Volatility

Abstract

Why are some sectors more volatile than others? This paper uncovers evidence of an empirical regularity in the U.S. economy: upstream sectors that are far removed from final consumers have higher levels of output volatility. The relationship between volatility and upstreamness is not driven by sector size, sector concentration, trade openness or the level of aggregation at which sectors are defined. Rather, the paper shows a stronger link between upstreamness and nominal output volatility, than with indexes of real output volatility. Aggregate exports at the national level also reflect the empirical regularity of higher volatility with upstreamness: Export volatility is higher in economies with trade portfolios dominated by upstream sectors. On average, reducing the upstreamness of exports by one, also reduces aggregate export volatility by about 10%. The pattern of higher volatility for upstream sectors is explained with a model of demand shock transmission between sectors.

Keywords: Sectoral Volatility, Upstreamness