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Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations

  • Chang-Jin Kim

    (Korea University)

  • Jeremy Piger

    (Federal Reserve Board)

We investigate the nature of asymmetries in U.S. business cycle dynamics using a dynamic two-factor model of output, investment, and consumption that incorporates both the common stochastic trend implied by neoclassical growth theory and a common transitory component. This framework allows for identification of both types of asymmetry commonly identified in the literature: 1. Shifts in the growth rate of the trend component and 2. Transitory deviations below trend, or "plucking". The model also lends itself easily to tests of the marginal significance of each type of asymmetry when the other is allowed to be present. Such tests suggest that both types of asymmetries have played a significant role in post-war recessions, although the nature of shifts in the growth rate of trend is different than the received literature suggests. We also allow for a one-time structural break in the long run growth rate of the common stochastic trend (a productivity slowdown) and in the magnitude of the asymmetry parameters. We find evidence of a productivity slowdown and an increase in the relative importance of shifts in the common stochastic trend vs. the "plucking" type of asymmetry. The evidence suggests a gradual structural break which begins in the mid 1960's and is complete by the end of 1973.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1465.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1465
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  11. Kim, Chang-Jin & Nelson, Charles R, 2001. "A Bayesian Approach to Testing for Markov-Switching in Univariate and Dynamic Factor Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 989-1013, November.
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