Idiosyncratic Sectoral Growth, Balanced Growth, and Sectoral Linkages

23 Pages Posted: 22 Oct 2018 Last revised: 21 Feb 2019

See all articles by Andrew T. Foerster

Andrew T. Foerster

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Eric LaRose

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: 2018

Abstract

We study the growth properties of an economy where different sectors are linked by way of intermediates and potentially grow at different rates. We characterize the economy's equilibrium balanced growth path, and derive an analytical expression that summarizes how TFP growth in a given sector affects value added growth in every other sector and, therefore, aggregate GDP growth. We show in a special case that a version of Hulten's (1978) theorem, whereby the effects of changes in sector-specific productivity on GDP are entirely captured by that sector's share in GDP, also holds in growth rates along a balanced growth path. In that case, changes in TFP growth specific to that sector do not directly affect value added in other sectors regardless of its linkages in the economy. In the more general case, changes in sectors that are more capital intensive, and central as intermediate goods suppliers, have larger effects on value added growth in other sectors and aggregate GDP. In a calibrated version of our benchmark case, we find substantive quantitative differences in the effects of sectoral TFP growth changes on GDP relative to the case where these effects are given by sectoral value added shares only.

Keywords: economic activity, total factor productivity, BEA

Suggested Citation

Foerster, Andrew T. and LaRose, Eric and Sarte, Pierre-Daniel, Idiosyncratic Sectoral Growth, Balanced Growth, and Sectoral Linkages (2018). Economic Quarterly, Issue 2Q, pp. 79-101, 2018. Available at SSRN: https://ssrn.com/abstract=3269123

Andrew T. Foerster (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco

101 Market Street
San Francisco, CA 94105
United States

Eric LaRose

Federal Reserve Banks - Federal Reserve Bank of Richmond

P.O. Box 27622
Richmond, VA 23261
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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