Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations
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Tara M Sinclair
This paper develops an unobserved components model for U.S. real GDP that allows for both asymmetric transitory movements and correlation between the permanent and transitory innovations. The asymmetry is modeled using Markov-switching in the transitory component in the spirit of Kim and Nelson's (1999) version of Friedman's plucking model. The findings suggest that ignoring the correlation between permanent and transitory movements underestimates the role of permanent movements, whereas ignoring asymmetry in the transitory component underestimates the role of temporary movements in U.S. real GDP. These results imply that both permanent movements and asymmetric transitory shocks are important for explaining post-war output fluctuations in the U.S. and for explaining the recession that began in 2007 in particular.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
- Article
- The Sticky Information Macro Model: Beyond Perfect Foresight
- Nonlinear Impacts of International Business Cycles on the U.K. -- A Bayesian Smooth Transition VAR Approach
- Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations
- On Justifications for the ad hoc Black-Scholes Method of Option Pricing
- Asymmetric News Effects on Exchange Rate Volatility: Good vs. Bad News in Good vs. Bad Times
Articles in the same Issue
- Article
- The Sticky Information Macro Model: Beyond Perfect Foresight
- Nonlinear Impacts of International Business Cycles on the U.K. -- A Bayesian Smooth Transition VAR Approach
- Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations
- On Justifications for the ad hoc Black-Scholes Method of Option Pricing
- Asymmetric News Effects on Exchange Rate Volatility: Good vs. Bad News in Good vs. Bad Times
