2019-16 | January 2020
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Aggregate Implications of Changing Sectoral Trends
We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. We embed this sectoral trend variation into a dynamic multi-sector framework where materials and capital used in each sector are produced by other sectors. We show that capital induces important dynamic network effects from production linkages that amplify the impact of shocks to sectoral inputs on aggregate growth, even absent nonlinearities in production. In some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' shares in the economy. We estimate that trend GDP growth has declined by more than 2 percentage points since 1950, and that growth contractions specific to Construction, Nondurable Goods, and Professional and Business and Services make up roughly sixty percent of the estimated trend decrease in GDP growth.
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Foerster, Andrew, Andreas Hornstein, Pierre-Daniel Sarte, and Mark Watson. 2019. "Aggregate Implications of Changing Sectoral Trends," Federal Reserve Bank of San Francisco Working Paper 2019-16. Available at https://doi.org/10.24148/wp2019-16