Working Paper: NBER ID: w26507
Authors: Christian Vom Lehn; Thomas Winberry
Abstract: We argue that the network of investment production and purchases across sectors is an important propagation mechanism for understanding business cycles. Empirically, we show that the majority of investment goods are produced by a few “investment hubs” which are more cyclical than other sectors. We embed this network into a multisector business cycle model and show that sector-specific shocks to the investment hubs and their key suppliers have large effects on aggregate employment and drive down labor productivity. Quantitatively, we find that sector-specific shocks to hubs and their suppliers account for an increasing share of aggregate fluctuations over time, generating the declining cyclicality of labor productivity and other changes in business cycle patterns since the 1980s.
Keywords: Investment Network; Business Cycles; Sectoral Shocks
JEL Codes: E22; E23; E24; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment network (G11) | Business cycle fluctuations (E32) |
| Sector-specific shocks to investment hubs (F69) | Aggregate employment (E24) |
| Sector-specific shocks to investment hubs (F69) | Labor productivity (O49) |
| Sector-specific shocks to investment hubs (F69) | Aggregate fluctuations (E10) |
| Shocks to investment hubs (F69) | Aggregate employment (E24) |
| Shocks to non-hub sectors (F69) | Aggregate employment (E24) |
| Sector-specific shocks (F69) | Production of investment goods (E22) |
| Production of investment goods (E22) | Employment levels (J23) |