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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 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 University of Washington, Department of Economics in its series Working Papers with number 0021.

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Date of creation: Mar 2000
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Handle: RePEc:udb:wpaper:0021
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