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Common stochastic trends, common cycles, and asymmetry in economic fluctuations

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  • Chang-Jin Kim
  • Jeremy M. Piger

Abstract

This paper investigates the nature of U.S. business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We identify a common stochastic trend and common transitory component by embedding the permanent income hypothesis within a simple growth model. Markov-switching in each component captures two types of asymmetry: Shifts in the growth rate of the common stochastic trend, having permanent effects, and "plucking" deviations from the common stochastic trend, having only transitory effects. Statistical tests suggest both asymmetries were present in post-war recessions, although the shifts in trend are less severe than found in the received literature.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-014.

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Date of creation: 2001
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Publication status: Published in Journal of Monetary Economics, September 2002, 49(6), pp. 1189-1211
Handle: RePEc:fip:fedlwp:2001-014

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Keywords: Business cycles ; Recessions;

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