The propagation of industrial business cycles

Abstract

This paper examines the business cycle linkages that propagate industry-specific business cycle shocks throughout the economy in a way that (sometimes) generate aggregated cycles. The transmission of sectorial business cycles is modelled through a multivariate Markov-switching model, which is estimated by Gibbs sampling. Based on nonparametric density estimation approaches, we find that the number and location of modes in the distribution of industrial dissimilarities change over the business cycle. There is a relatively stable trimodal pattern during expansionary and recessionary phases characterized by highly, moderately and lowly synchronized industries. However, during phase changes, the density mass spreads out from the central part to the higher end of lowly synchronized industries.