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Asymmetry in the Business Model: Revisiting the Friedman Plucking Model


  • Tara Sinclair

    () (Department of Economics/Institute for International Economic Policy, George Washington University)


Recent research suggests that unobserved components models can, under certain conditions, be estimated without imposing the common zero-correlation restriction between the permanent and transitory innovations. The impact of this restriction, however, has not previously been examined in an unobserved components model with asymmetric movements. This paper produces and estimates an unobserved components model that allows for both correlation between the innovations and asymmetric transitory movements. The asymmetry is modeled using Markov-switching in the transitory component, in the spirit of the Kim and Nelson (1999) version of the Friedman plucking model. The results reveal that U.S. real GDP can be decomposed into a permanent component, a symmetric transitory component, and an additional occasional asymmetric transitory shock. The innovations to the permanent component and the symmetric transitory component are significantly negatively correlated, but the asymmetric transitory shock is exogenous. The findings suggest that both permanent movements and asymmetric transitory shocks are important for explaining post-war output fluctuations in the U.S.

Suggested Citation

  • Tara Sinclair, 2008. "Asymmetry in the Business Model: Revisiting the Friedman Plucking Model," Working Papers 2008-03, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2008-03

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    References listed on IDEAS

    1. Enzler, Jared J & Stekler, H O, 1971. "An Analysis of the 1968-69 Economic Forecasts," The Journal of Business, University of Chicago Press, vol. 44(3), pages 271-281, July.
    2. repec:ebl:ecbull:v:5:y:2003:i:3:p:1-9 is not listed on IDEAS
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    More about this item


    Asymmetry; Unobserved Components; Markov-Switching; Business Cycles;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles


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