What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?

47 Pages Posted: 11 Apr 2019

See all articles by Christian Matthes

Christian Matthes

Federal Reserve Bank of Richmond

Felipe Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2019-03-29

Abstract

We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the "demand" side (monetary, household, and government consumption) account for 43 percent more of the variance of U.S. GDP growth at business cycle frequencies than identified shocks originating in the "supply" side (technology and energy). Furthermore, corporate financial shocks, which theory suggests propagate to large extent through demand channels, account for an amount of the variance equal to an additional 82 percent of the fraction explained by these supply shocks.

Keywords: Aggregate Shocks, Sectoral Data, Bayesian Analysis, Impulse Responses

JEL Classification: C11, C50, E30

Suggested Citation

Matthes, Christian and Schwartzman, Felipe, What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles? (2019-03-29). FRB Richmond Working Paper No. 19-9. Available at SSRN: https://ssrn.com/abstract=3368337

Christian Matthes (Contact Author)

Federal Reserve Bank of Richmond ( email )

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

Felipe Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond

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