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A0567
Title: Industrial connectedness and business cycle comovements Authors:  Michael Owyang - Federal Reserve Bank of St Louis (United States) [presenting]
Amy Guisinger - Lafayette College (United States)
Daniel Soques - University of North Carolina Wilmington (United States)
Abstract: The effect of economic shocks on business cycles fluctuations at an industry level may vary across industries. For example, monetary shocks may have disparate effects, depending on the responsiveness of the particular industry to variations in the interest rate. Moreover, shocks that originate in a single industry may propagate elsewhere, either up or downstream in the production chain. Thus, more connected industries may be more vulnerable to industry-specific economic shocks. However, any model of industrial connectiveness must account for the fact that national shocks will drive much of the inter-industry correlation. In light of this, we develop a panel Markov-switching model for industry-level data that incorporates several features relevant for sub-national analysis. First, we model industry-level trends to differentiate between cyclical downturns and the secular decline in an industry. Second, we incorporate a national-level business cycle that industries may or may not attach to. Third, we model co-movement off of the national-level cycle as factors that affect clusters of industries.