Real sectoral spillovers: A dynamic factor analysis of the great recession

Abstract

Dynamic factor methods are used to identify the impact of common and idiosyncratic shocks on sixteen U.S. nonfarm business sectors. This paper then studies changes in the transmission of these shocks across sectors during the Great Recession, and evaluates the cross-sectoral spillovers. The Great Recession is found to be largely a time of heightened impact of common shocks–which accounts for 3/4 of aggregate volatility–and large spillovers of negative finance-related shocks. In addition, prior to the Recession, aggregate fluctuations are mainly driven by sector-specific shocks, in contrast with findings from previous studies.