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Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations

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  • Sinclair Tara M

    ()
    (George Washington University)

Abstract

This paper develops an unobserved components model for U.S. real GDP that allows for both asymmetric transitory movements and correlation between the permanent and transitory innovations. The asymmetry is modeled using Markov-switching in the transitory component in the spirit of Kim and Nelson's (1999) version of Friedman's plucking model. The findings suggest that ignoring the correlation between permanent and transitory movements underestimates the role of permanent movements, whereas ignoring asymmetry in the transitory component underestimates the role of temporary movements in U.S. real GDP. These results imply that both permanent movements and asymmetric transitory shocks are important for explaining post-war output fluctuations in the U.S. and for explaining the recession that began in 2007 in particular.

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File URL: http://www.degruyter.com/view/j/snde.2009.14.1/snde.2009.14.1.1688/snde.2009.14.1.1688.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 14 (2009)
Issue (Month): 1 (December)
Pages: 1-31

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Handle: RePEc:bpj:sndecm:v:14:y:2009:i:1:n:3

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Web page: http://www.degruyter.com

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Cited by:
  1. Bernard Fingleton & Harry Garretsen & Ron Martin, 2012. "Recessionary Shocks And Regional Employment: Evidence On The Resilience Of U.K. Regions," Journal of Regional Science, Wiley Blackwell, vol. 52(1), pages 109-133, 02.
  2. Guérin, Pierre & Maurin, Laurent & Mohr, Matthias, 2011. "Trend-cycle decomposition of output and euro area inflation forecasts: a real-time approach based on model combination," Working Paper Series 1384, European Central Bank.
  3. Philippe Moës, 2012. "Multivariate models with dual cycles: implications for output gap and potential growth measurement," Empirical Economics, Springer, vol. 42(3), pages 791-818, June.
  4. Juan Urquiza, 2011. "Income Asymmetries and the Permanent Income Hypothesis," Documentos de Trabajo 409, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Klinger, Sabine & Weber, Enzo, 2012. "Decomposing Beveridge curve dynamics by correlated unobserved components," IAB Discussion Paper 201228, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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