Aggregation and irrelevance in multi-sector models

Abstract

This paper studies the ability of input–output relationships to generate fluctuations in aggregate output in several multi-sector models, including that of Long and Plosser (1983). In these models, the manufacture of each sector’s output depends on other sectors for materials. These interconnections provide a mechanism for transmission of shocks across sectors and over time. We ask how aggregates from these multi-sector models behave relative to single-sector models. We provide conditions under which the second moment properties of aggregates in these models are the same as their single-sector counterparts. We further demonstrate that a broad class of input–output structures generate aggregates with identical second moment properties, and that the input–output structures in this class provide a poor amplification mechanism for sector shocks.

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