Industrial Connectedness and Business Cycle Comovements

38 Pages Posted: 5 Jan 2021

See all articles by Amy Guisinger

Amy Guisinger

George Washington University

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Daniel Soques

University of North Carolina (UNC) at Wilmington

Date Written: December 1, 2020

Abstract

The effect of economic shocks on business cycles fluctuations may vary across industries. For example, shocks that originate in a single industry may propagate elsewhere, either up or down stream in the production chain. Thus, industries that are more connected may be more vulnerable to industry-specific economic shocks. However, any model of industrial connectedness must account for the fact that much of the inter-industry correlation will be driven by national shocks. In light of this, we develop a panel Markov-switching model for industry-level data that incorporates a number of features relevant for sub-national analysis. First, we model industry-level trends to differentiate between cyclical downturns and secular decline in an industry. Second, we incorporate a national-level business cycle that industries may or may not attach to. Third, we model comovement off of the national-level cycle as factors that affect clusters of industries. We find that there are industry groupings that comove because their production networks are intrasectoral and industry groupings that lack inter or intra-sectoral classification, but most industries move together.

JEL Classification: C32, E32

Suggested Citation

Guisinger, Amy and Owyang, Michael T. and Soques, Daniel, Industrial Connectedness and Business Cycle Comovements (December 1, 2020). FRB St. Louis Working Paper No. 2020-052, Available at SSRN: https://ssrn.com/abstract=3760156 or http://dx.doi.org/10.20955/wp.2020.052

Amy Guisinger

George Washington University

2121 I Street NW
Washington, DC 20052
United States

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Daniel Soques

University of North Carolina (UNC) at Wilmington ( email )

601 South College Road
Wilmington, NC 28403
United States

HOME PAGE: http://people.uncw.edu/soquesd/index.html

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