Molnarova, Zuzana Molnárová, Zuzana Reiter, Michael
Year of Publication:
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Business Cycles: Firms and Banks A08-V1
This paper studies the relative importance of aggregate and industry-specific shocks in generating business cycle fluctuations. We assess the role of demand and supply side shocks at the aggregate and the industry level. We build a highly disaggregated multi-industry DSGE model with an input-output network structure. In the model, fluctuations in measured total factor productivity can arise as an endogenous response to demand shocks. The model is estimated by the simulated method of moments using U.S. industry data from 1960 to 2005. We show that aggregate technology shocks play a small role in explaining business cycles. Instead, aggregate demand shocks together with industry-specific technology shocks are important drivers of fluctuations of output and productivity. Demand shocks explain 60% of the variance of GDP and more than 10% of measured aggregate productivity. Industry-specific technology shocks are transmitted via input-output linkages and affect output and measured productivity in connected industries. They alone explain 50% of the variance of aggregate productivity and more than 20% of the variance in GDP. The presence of the input-output network is crucial for the results. The linkages between industries decrease the share of aggregate fluctuations explained by aggregate technology shock by 40 percentage points.