Factor Demand Linkages, Technology Shocks and the Business Cycle

This paper argues that factor demand linkages are crucial in the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise, there is a negative correlation as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of business cycles.