Working Paper

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

Abstract: 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.

Keywords: Business cycles; Recessions;

Status: Published in Journal of Monetary Economics, September 2002, 49(6), pp. 1189-1211

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2001

Number: 2001-014