THE COVARIABILITY OF PRODUCTIVITY SHOCKS ACROSS INDUSTRIES

This paper examines the covariability of industry-level productivity s hocks to ask whether these shocks could drive an aggregate real busine ss cycle model. Following Hall's insight, productivity shocks are meas ured by purging total factor productivity of its component that is spu riously procyclical due to market power (or labor hoarding). Then the covariability of these productivity shock series is examined in a dyna mic factor-analysis model. Removing the spuriously procyclical compone nt of TFP greatly reduces the covariability of productivity shocks, an d the aggregate productivity shock estimates are only slightly procycl ical. Therefore, the paper provides some direct evidence suggesting th at aggregate productivity shocks are of little importance for explaini ng aggregate output changes.