Macroeconomic Effects of Sectoral Shocks
in Germany, the U.K. and, the U.S.:
A VAR-GARCH-M Approach

Abstract. A VAR-GARCH-M model for aggregate employment and employment shares is developed to explore the macroeconomic effects of sectoral shocks. Using U.S., U.K. and German
data, three main issues are investigated: the relevance of shocks volatility; the amount of aggregate employment growth variation accounted for by re-allocation shocks and the amount of aggregate innovation volatility explained by sectoral components. Bayesian methods are used for estimation model selection and innovation accounting – Bayes factors for model selection and MCMC for estimation. The results favor the VAR-GARCH-Mmodel. A significant GARCH-Mcomponent indicates the presence of volatility clustering and the feedback of volatilities on aggregate employment and sectoral shares growth rates. The innovation analysis supports sectoral shocks as a triggering force for aggregate employment fluctuations. In all three countries, 45% to 55% of aggregate employment variation is accounted for by sectoral innovations.
Key words: intersectoral labour re-allocation, aggregate employment fluctuations, non-linearities,
VAR-GARCH models