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

  • Chang-Jin Kim
  • Jeremy M. Piger

This paper investigates the nature of U.S. business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We identify a common stochastic trend and common transitory component by embedding the permanent income hypothesis within a simple growth model. Markov-switching in each component captures two types of asymmetry: Shifts in the growth rate of the common stochastic trend, having permanent effects, and "plucking" deviations from the common stochastic trend, having only transitory effects. Statistical tests suggest both asymmetries were present in post-war recessions, although the shifts in trend are less severe than found in the received literature.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-014.

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Date of creation: 2001
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Publication status: Published in Journal of Monetary Economics, September 2002, 49(6), pp. 1189-1211
Handle: RePEc:fip:fedlwp:2001-014
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  4. Chang-Jin Kim & Charles Nelson, 1999. "A Bayesian Approach to Testing for Markov Switching in Univariate and Dynamic Factor Models," Working Papers 0035, University of Washington, Department of Economics.
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  23. Martin D. Evans & Karen K. Lewis, 1992. "Trends in Excess Returns in Currency and Bond Markets," Working Papers 92-32, New York University, Leonard N. Stern School of Business, Department of Economics.
  24. 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.
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  37. 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.
  38. Cooper, Russell, 1994. "Equilibrium Selection in Imperfectly Competitive Economies with Multiple Equilibria," Economic Journal, Royal Economic Society, vol. 104(426), pages 1106-22, September.
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  41. Chang-Jin Kim & Christian J. Murray, 2002. "Permanent and transitory components of recessions," Empirical Economics, Springer, vol. 27(2), pages 163-183.
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  46. repec:fth:harver:1418 is not listed on IDEAS
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