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

  • Chang-Jin Kim
  • Jeremy Piger

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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 681.

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Date of creation: 2000
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Handle: RePEc:fip:fedgif:681
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  20. Charles Nelson & Jeremy Piger & Eric Zivot, 1999. "Unit Root Tests in the Presence of Markov Regime-Switching," Discussion Papers in Economics at the University of Washington 0040, Department of Economics at the University of Washington.
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  47. repec:fth:harver:1418 is not listed on IDEAS
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