Abstract
We examine the role of sectoral shocks in driving aggregate fluctuations for the Australian economy between 1994 and 2023, focusing on the differences from before to after the onset of the COVID-19 pandemic. Using both statistical and structural factor models for disaggregated industrial production, we find that sectoral shocks accounted for a substantial portion of aggregate volatility prior to the pandemic.
The structural model, which explicitly incorporates production network linkages, suggests that over 80% of pre-COVID aggregate fluctuations can be attributed to sector-specific shocks. However, with the onset of the pandemic, both models indicate a shift to aggregate shocks dominating. We document notable similarities between pre-COVID Australia and the U.S. Great Moderation in terms of sectoral volatilities and shock propagation patterns, despite clear differences in economic structure across the two countries.