Identifying Sectoral Shocks and Their Role in Business Cycles

Abstract: US business cycles can be empirically characterized as a time-varying mix of different sectoral shocks. Sectoral shocks are distinct from aggregate shocks and better capture business cycle fluctuations. A typical recession (or boom) is interpreted as the combination of a few sectoral shocks, which encompass more diverse origins than the typical narrative prevalent for that recession. Sectoral shocks have aggregate consequences through strong input–output network effects. Identification is based on network-implied heterogeneity restrictions in a FAVAR framework and far less dependent on specific DSGE calibrations compared to previous work.