Review of Economic Dynamics 9 (2006) 455–482
www.elsevier.com/locate/red
The role of agriculture in aggregate business cycles
✩
José M. Da-Rocha
a
, Diego Restuccia
b,c,∗
a
Universidade de Vigo
b
Federal Reserve Bank of Richmond
c
University of Toronto, Department of Economics, 150 St. George Street, Toronto, ON, Canada M5S 3G7
Received 18 October 2002; revised 28 November 2005
Available online 18 April 2006
Abstract
There are substantial differences in business cycle fluctuations across countries. These differences are
systematically related to the share of agriculture in the economy: Countries with a high share of employment
in agriculture feature high fluctuations in aggregate output, low relative volatility of aggregate employment,
and low correlation of aggregate output and employment. In addition, agriculture has certain distinctive
features over the business cycle: Output and employment in agriculture are more volatile than and not
positively correlated with output and employment in the rest of the economy and output and employment
are less correlated in agriculture than in non-agriculture. Because of these features, agriculture may play a
role in accounting for aggregate business cycles across countries. We calibrate an otherwise standard two-
sector indivisible-labor business cycle model with agriculture and non-agriculture to aggregate and sectoral
data for the United States. We find that an increase in the employment to population ratio in agriculture
from 2 to 30 percent in our model increases fluctuations in aggregate output by almost 40 percent. This
is about 2/3 of the difference in aggregate fluctuations between countries such as Turkey and the United
States.
©
2006 Elsevier Inc. All rights reserved.
JEL classification: E32
Keywords: Business cycles; Agriculture; Two-sector model
✩
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of
Richmond or the Federal Reserve System.
*
Corresponding author. Fax: +1 416 978 5519.
E-mail addresses: jmrocha@uvigo.es (J.M. Da-Rocha), diego.restuccia@utoronto.ca (D. Restuccia).
1094-2025/$ – see front matter © 2006 Elsevier Inc. All rights reserved.
doi:10.1016/j.red.2005.12.002