The Multi-Sector Business Cycle Model and Aggregate Shocks: An Empirical Analysis

Abstract

This paper discusses the applicability of a multi-sector business cycle model to the Japanese economy. Through dynamic factor analysis, output fluctuations are decomposed into aggregate and sectoral shocks. It is shown that independent sectoral shocks are more significant than common shocks, which conclusion is consistent with the model proposed by Long and Plosser (1983). In addition, the paper reveals that the importance of aggregate shocks increased during the so-called "bubble" period of the late 1980's.Dynamic factor analysis, Aggregate shocks, Business-cycle models