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Federal Reserve Bank of Richmond
Working Paper
Intermediate inputs and sectoral comovement in the business cycle
Andreas Hornstein
Jack Praschnik
Abstract

The postwar U.S. business cycle is characterized by positive comovement of employment and output across sectors. It has been argued that multi-sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations. We suggest that the input-output structure of an economy, in particular the pervasive use of intermediate inputs, can induce positive comovement in sectoral employment and output following changes in relative productivities. We calibrate a model of the U.S. economy for the durable and nondurable goods producing sectors, and show that sectoral employment and output move together if intermediate inputs are used in production. The model is also consistent with the observation that the relative price of nondurable goods is procyclical.


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Andreas Hornstein & Jack Praschnik, Intermediate inputs and sectoral comovement in the business cycle, Federal Reserve Bank of Richmond, Working Paper 97-06, 1997.
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Keywords: Business cycles
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