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Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations

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  • Sinclair Tara M

    (George Washington University)

Abstract

This paper develops an unobserved components model for U.S. real GDP that allows for both asymmetric transitory movements and correlation between the permanent and transitory innovations. The asymmetry is modeled using Markov-switching in the transitory component in the spirit of Kim and Nelson's (1999) version of Friedman's plucking model. The findings suggest that ignoring the correlation between permanent and transitory movements underestimates the role of permanent movements, whereas ignoring asymmetry in the transitory component underestimates the role of temporary movements in U.S. real GDP. These results imply that both permanent movements and asymmetric transitory shocks are important for explaining post-war output fluctuations in the U.S. and for explaining the recession that began in 2007 in particular.

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  • Sinclair Tara M, 2009. "Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(1), pages 1-31, December.
    • Handle: RePEc:bpj:sndecm:v:14:y:2009:i:1:n:3
    DOI: 10.2202/1558-3708.1688
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    2. James Morley, 2014. "Measuring economic slack in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 35-50, Bank for International Settlements.
    3. Juan Urquiza, 2011. "Income Asymmetries and the Permanent Income Hypothesis," Documentos de Trabajo 409, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Angelia L. Grant & Joshua C.C. Chan, 2017. "A Bayesian Model Comparison for Trend‐Cycle Decompositions of Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 525-552, March.
    5. Bernard Fingleton & Harry Garretsen & Ron Martin, 2012. "Recessionary Shocks And Regional Employment: Evidence On The Resilience Of U.K. Regions," Journal of Regional Science, Wiley Blackwell, vol. 52(1), pages 109-133, February.
    6. Sabine Klinger & Enzo Weber, 2016. "Decomposing Beveridge Curve Dynamics By Correlated Unobserved Components," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(6), pages 877-894, December.
    7. Klinger, Sabine & Weber, Enzo, 2015. "GDP-Employment Decoupling and the Productivity Puzzle in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 485, University of Regensburg, Department of Economics.
    8. James Morley, 2014. "Measuring Economic Slack: A Forecast-Based Approach with Applications to Economies in Asia and the Pacific," BIS Working Papers 451, Bank for International Settlements.
    9. Guérin, Pierre & Maurin, Laurent & Mohr, Matthias, 2015. "Trend-Cycle Decomposition Of Output And Euro Area Inflation Forecasts: A Real-Time Approach Based On Model Combination," Macroeconomic Dynamics, Cambridge University Press, vol. 19(2), pages 363-393, March.
    10. Hartley, Jonathan S., 2021. "Friedman’s plucking model: New international evidence from Maddison Project data," Economics Letters, Elsevier, vol. 199(C).

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