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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Paper provided by University of Washington, Department of Economics in its series Working Papers with number
97-06.