Abstract

In a dynamic economy with investment, Domar weights give the effects of sectoral productivity on lifetime aggregate consumption. This generalization of Hulten's theorem follows from production efficiency alone, with Domar weights serving only as partial indicators of consumption efficiency. Domar weights more generally consist of a current component and an investment-propagation component that together determine the effects of sectoral shocks on current GDP,  but the composition of Domar weights determines how persistent these effects are. This persistence cannot be assessed absent information on the economy's production structure. We show in a structural model that sectoral shocks influence future GDP through a weighted sum of all Domar weights. The weights reflect the production attributes of downstream sectors including, most notably, their capital share. Given the features of U.S. production, the structural model implies that i) over a three year-period, goods-producing sectors have larger cumulative aggregate effects than service-producing sectors, despite goods representing less than 1/3 of the U.S. economy, and ii) Domar weights become gradually less informative about the aggregate effects of sectoral shocks over several years, rather than immediately after the shocks materialize as in a static environment. Model-free local projections of U.S. GDP growth on observed sectoral TFP growth confirm both these findings. 

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