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The dynamic relationship between permanent and transitory components of U.S. business cycles

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  • Chang-Jin Kim
  • Jeremy Piger
  • Richard Startz

Abstract

This paper investigates the dynamic relationship between permanent and transitory components of post-war U.S. business cycles. We specify a time-series model for real GNP and consumption in which the two share a common stochastic trend and transitory component, and Markov-regime switching is used to model business cycle phases in these components. The timing of switches between business cycle phases is allowed to differ across the permanent and transitory components. We find strong evidence of a lead-lag relationship between the switches in the two components. Specifically, switches in the permanent component leads switches in the transitory component when entering recessions.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-017.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2001-017

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Keywords: Business cycles ; Recessions;

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References

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  1. Martin D. Evans & Karen K. Lewis, 1992. "Trends in Expected Returns in Currency and Bond Markets," Working Papers 92-20, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Chang-Jin Kim & Jeremy Piger, 2000. "Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations," Working Papers 0021, University of Washington, Department of Economics.
  3. Garcia, Rene, 1998. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-88, August.
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  7. Chang-Jin Kim & Charles Nelson, 1999. "A Bayesian Approach to Testing for Markov Switching in Univariate and Dynamic Factor Models," Working Papers 0035, University of Washington, Department of Economics.
  8. Acemoglu, Daron & Scott, Andrew, 1997. "Asymmetric business cycles: Theory and time-series evidence," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 501-533, December.
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Citations

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Cited by:
  1. Chin Nam Low & Heather Anderson & Ralph Snyder, 2006. "Beverridge Nelson Decomposition With Markov Switching," CAMA Working Papers 2006-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Richard G. Anderson & Barry Jones & Marcelle Chauvet, 2013. "Nonlinear relationship between permanent and transitory components of monetary aggregates and the economy," Working Papers 2013-018, Federal Reserve Bank of St. Louis.
  3. Senyuz, Zeynep, 2009. "Factor Analysis of Permanent and Transitory Dynamics of the U.S. Economy and the Stock Market," MPRA Paper 26855, University Library of Munich, Germany, revised Mar 2010.
  4. Attfield, Cliff & Temple, Jonathan R.W., 2010. "Balanced growth and the great ratios: New evidence for the US and UK," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 937-956, December.

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