SECTORAL EFFECTS OF BUSINESS CYCLES

Abstract

This paper studies the short-run and long-run interactions between the sectors and the aggregate output in Singapore which is a small open economy. The vector autoregression technique is used to establish the short-run relationships and to detect Granger causality. Cointegration and error-correction models are used to determine the long-run equilibrium relations which the sectors have with the aggregate output. In the short-run, the study finds that the Manufacturing sector leads aggregate output, and aggregate output in turn leads Commerce and Quarrying sectors. The results also show that the Utilities and Agriculture & Fishing sectors are contemporaneous with aggregate output, while Construction and Transport & Communications sectors are independent of the business cycle. The results for the Financial & Business Services and Other Services sectors are however mixed. The results from cointegration and error-correction models indicate that only Agricultural & Fishing, Utilities, Manufacturing, Financial & Business and Other Services sectors have long-run equilibrium relationship with aggregate output.