How Important Are Sectoral Shocks in Australia?

We examine the role of sectoral shocks in driving aggregate fluctuations for the Australian economy between 1994 and 2023, comparing the pre‐COVID and COVID periods. 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 of pre‐COVID aggregate fluctuations can be attributed to sectoral shocks. With the onset of the pandemic, both models indicate a shift toward common variation, and the structural model attributes COVID‐period volatility primarily to aggregate shocks. We document notable similarities between pre‐COVID Australia and the US Great Moderation in terms of sectoral volatilities and shock propagation patterns, despite clear differences in economic structure across the two countries.