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Common stochastic trends, common cycles, and asymmetry in economic fluctuations

  • Kim, Chang-Jin
  • Piger, Jeremy

This paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We first identify a common stochastic trend and a common transitory component by embedding the permanent income hypothesis within a simple growth model. We then investigate two types of asymmetry commonly identified in U.S. business cycle dynamics: (1) Infrequent negative permanent shocks, modeled as shifts in the growth rate of the common stochastic trend and (2) infrequent negative transitory shocks, modeled as "plucking" deviations from the common stochastic trend. Tests of marginal significance suggest both types of asymmetry were present in post-war recessions, although the shifts in trend are less severe than the received literature suggests.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 49 (2002)
Issue (Month): 6 (September)
Pages: 1189-1211

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Handle: RePEc:eee:moneco:v:49:y:2002:i:6:p:1189-1211
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  8. Kim, C-J & Nelson, C-R, 1997. "Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components," Working Papers 97-06, University of Washington, Department of Economics.
  9. Chang-Jin Kim & Charles Nelson, 1999. "A Bayesian Approach to Testing for Markov Switching in Univariate and Dynamic Factor Models," Discussion Papers in Economics at the University of Washington 0035, Department of Economics at the University of Washington.
  10. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
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  37. repec:fth:harver:1418 is not listed on IDEAS
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  39. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
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