An inquiry into the sources of macroeconomic fluctuations

Abstract

This paper attempts to decompose the sources of fluctuations in quarterly employment by industry and region into: (1) an aggregate (national) shock, (2) region-specific shocks, (3) industry-specific shocks, and (4) idiosyncratic factors. The empirical analysis is motivated by a dynamic theory of the business cycle. The empirical methodology is the Engle-Watson dynamic MIMIC model, implemented via the EM algorithm. The work is motivated as an attempt to compare empirically aggregate, ‘single-factor’ theories of the cycle with real business cycle theories emphasizing industrial or regional shocks.