Working Paper: CEPR ID: DP16804
Authors: Ian Dewbecker; Alireza Tahbazsalehi; Andrea Vedolin
Abstract: This paper studies asymmetry in economic activity over the business cycle. It develops a tractable multisector model of the economy in which complementarity across inputs causes aggregate activity to be left skewed with countercyclical volatility. We then examine implications of the model regarding the time-series skewness of activity at the sector level, cyclicality of dispersion and skewness across sectors, and the conditional covariances of sector growth rates, finding support for each in the data. The empirical skewness of employment growth, industrial production growth, and stock returns increases with the level of aggregation, which is consistent with the model's implication that it is the nonlinearity in the production structure of the economy that generates the skewness. Other prominent models of asymmetry are not able to simultaneously match the range of empirical facts that the production network model can.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Complementarity in inputs (D10) | Negative skewness in aggregate output (D39) |
| Negative skewness in aggregate output (D39) | Cross-sectional variance of output is countercyclical (E32) |
| Negative skewness in aggregate output (D39) | Cross-sectional skewness is procyclical (E32) |
| Negative shock in a sector (E32) | Conditional covariances with other sectors rise (C10) |
| Negative shock in a sector (E32) | Conditional covariances with aggregate activity rise (C10) |
| Conditional covariances with other sectors rise (C10) | Sector becomes more central in determining overall economic output (L16) |
| Conditional covariances with aggregate activity rise (C10) | Sensitivity of aggregate output to sector-specific shocks increases (E16) |