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Asymmetry in the Business Model: Revisiting the Friedman Plucking Model

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  • Tara Sinclair

    ()
    (Department of Economics/Institute for International Economic Policy, George Washington University)

Abstract

Recent research suggests that unobserved components models can, under certain conditions, be estimated without imposing the common zero-correlation restriction between the permanent and transitory innovations. The impact of this restriction, however, has not previously been examined in an unobserved components model with asymmetric movements. This paper produces and estimates an unobserved components model that allows for both correlation between the innovations and asymmetric transitory movements. The asymmetry is modeled using Markov-switching in the transitory component, in the spirit of the Kim and Nelson (1999) version of the Friedman plucking model. The results reveal that U.S. real GDP can be decomposed into a permanent component, a symmetric transitory component, and an additional occasional asymmetric transitory shock. The innovations to the permanent component and the symmetric transitory component are significantly negatively correlated, but the asymmetric transitory shock is exogenous. The findings suggest that both permanent movements and asymmetric transitory shocks are important for explaining post-war output fluctuations in the U.S.

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File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Sinclair_IIEPWP2008-3.pdf
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Bibliographic Info

Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2008-03.

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Length: 32 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:gwi:wpaper:2008-03

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Web page: http://www.gwu.edu/~iiep/
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Related research

Keywords: Asymmetry; Unobserved Components; Markov-Switching; Business Cycles;

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  1. repec:ebl:ecbull:v:5:y:2003:i:3:p:1-9 is not listed on IDEAS
  2. Enzler, Jared J & Stekler, H O, 1971. "An Analysis of the 1968-69 Economic Forecasts," The Journal of Business, University of Chicago Press, vol. 44(3), pages 271-81, July.
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