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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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  1. Elwood, S. Kirk, 1998. "Is the persistence of shocks to output asymmetric?," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 411-426, April.
  2. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  3. Chang-Jin Kim & Christian J. Murray, 2002. "Permanent and transitory components of recessions," Empirical Economics, Springer, vol. 27(2), pages 163-183.
  4. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
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  8. Evans, Martin D. D. & Lewis, Karen K., 1993. "Trends in excess returns in currency and bond markets," European Economic Review, Elsevier, vol. 37(5), pages 1005-1019, June.
  9. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  10. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
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  14. Perron, P., 1987. "The Great Crash, the Oil Prices and the Unit Root Hypothesis," Cahiers de recherche 8749, Universite de Montreal, Departement de sciences economiques.
  15. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
  16. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  17. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  18. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  19. Wynne, Mark A. & Balke, Nathan S., 1992. "Are deep recessions followed by strong recoveries?," Economics Letters, Elsevier, vol. 39(2), pages 183-189, June.
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  23. René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
  24. 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.
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  26. repec:fth:harver:1418 is not listed on IDEAS
  27. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  28. Cooper, Russell, 1994. "Equilibrium Selection in Imperfectly Competitive Economies with Multiple Equilibria," Economic Journal, Royal Economic Society, vol. 104(426), pages 1106-22, September.
  29. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
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  34. Acemoglu, Daron & Scott, Andrew, 1997. "Asymmetric business cycles: Theory and time-series evidence," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 501-533, December.
  35. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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  39. Evans, M.D.D. & Lewis, K.K., 1993. "Trends in Expected Returns in Currency and Bond Markets," Weiss Center Working Papers 93-4, Wharton School - Weiss Center for International Financial Research.
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  44. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  45. Kim, Chang-Jin, 1993. "Unobserved-Component Time Series Models with Markov-Switching Heteroscedasticity: Changes in Regime and the Link between Inflation Rates and Inflation Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 341-49, July.
  46. Kim, Chang-Jin, 1993. "Sources of Monetary Growth Uncertainty and Economic Activity: The Time-Varying-Parameter Model with Heteroskedastic Disturbances," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 483-92, August.
  47. Nathan S. Balke & Mark A. Wynne, 1995. "Are deep recessions followed by strong recoveries? Results for the G-7 countries," Working Papers 9509, Federal Reserve Bank of Dallas.
  48. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department.
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