Persistence of Shocks and their Sources in a Multisectoral Model of UK Output Growth

Pesaran, Pierse, and Lee (1991) advocated the use of sectoral output data in order to bring extra information to bear on the analysis of persistence at the aggregate level. Empirical support for this approach was presented by analyzing output growth in the US using data disaggregated according to a 10-sector classification. The multisectoral model is further developed and is shown to be an appropriate framework with which to analyze persistence in the UK economy as well. In almost all sectors, the contribution of the macro shocks (oil price shocks, money shocks, foreign exchange shocks, and stock market shocks) to total persistence is relatively small. The results indicate that, among the 4 shocks, it is the foreign exchange shocks that have the largest persistence effects on aggregate output, primarily exerted through their effect on the durable and nondurable manufacturing sectors. The estimate of the aggregate persistence measure based on the multisectoral model is lower than that obtained from a univariate model.