Intersectoral network‐based channel of aggregate TFP shocks

Abstract

AbstractThis study investigates the role of intersectoral networks in the transmission of aggregate technology shocks to sectors' growth. First, we develop a theoretical model to obtain insights into the propagation of shocks through input–output linkages, which suggests that the network effect arises via sectoral downstream linkages. We then quantitatively assess this theoretical implication with United States manufacturing industries, where the aggregate technology shocks are derived from a dynamic factor model. We find that aggregate technology shocks lead to an increase in the output growth of the sector, both directly and indirectly via its intersectoral linkages. More interestingly, we document a crucial role of the intersectoral network channel, which contributes about 50% of the total effect. In addition, the network‐based effect comes mostly from downstream linkages of sectors, which is broadly consistent with theory.