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Permanent and transitory components of business cycles: their relative importance and dynamic relationship

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  • Chang-Jin Kim
  • Jeremy Piger
  • Richard Startz

Abstract

This paper investigates the relationship between permanent and transitory components of U.S. recessions in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession for the permanent component to be correlated with switches from boom to recession in the transitory component. The parameter estimates suggest a specific pattern of recessions: switches in the permanent component lead switches in the transitory component both when entering and leaving recessions.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 703.

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Date of creation: 2001
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Handle: RePEc:fip:fedgif:703

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Related research

Keywords: Business cycles ; Recessions;

This paper has been announced in the following NEP Reports:

References

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Cited by:
  1. Yoon & Jae Ho, 2004. "Has the G7 business cycle become more synchronized ?," Econometric Society 2004 Far Eastern Meetings 782, Econometric Society.
  2. Yoon & Jae Ho, 2004. "Oil and the G7 business cycle : Friedman's Plucking Markov Switching Approach," Econometric Society 2004 Far Eastern Meetings 773, Econometric Society.

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