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Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components

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  • Kim, C-J
  • Nelson, C-R

Abstract

More than thirty years ago Milton Friedman proposed a 'plucking' model of business fluctuations in which output cannot exceed a ceiling level, but will, from time to time, be plucked downward by recession. The model implied that business fluctuations are asymmetric, that recessions have only a temporary effect on output, and that recessions are duration dependent while expansions are not. Subsequent literature has provided copious empirical support for these propositions, but econometric models of business fluctuations have not incorporated these features. This paper presents a formal econometric model which encompasses both plucking and asymmetric fluctuations around a stochatic trend while allowing for heteroskedasticity and shocks to the growth rate.

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Bibliographic Info

Paper provided by Department of Economics at the University of Washington in its series Discussion Papers in Economics at the University of Washington with number 97-06.

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Length: 19 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:washer:97-06

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Keywords: ECONOMIC MODELS ; ECONOMETRICS ; BUSINESS CYCLES ; ECONOMIC GROWTH;

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