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Working Paper
Nonlinearity and the permanent effects of recessions
This paper presents a new nonlinear time series model that captures a post-recession ?bounce-back? in the level of aggregate output. While a number of studies have examined this type of business cycle asymmetry using recession-based dummy variables and threshold models, we relate the ?bounce-back? effect to an endogenously estimated unobservable Markov-switching state variable. When the model is applied to U.S. real GDP, we find that the Markov-switching regimes are closely related to NBER-dated recessions and expansions. Also, the Markov-switching form of nonlinearity is statistically ...
Working Paper
Estimation of Markov regime-switching regression models with endogenous switching
Following Hamilton (1989), estimation of Markov regime-switching regressions nearly always relies on the assumption that the latent state variable controlling the regime change is exogenous. We incorporate endogenous switching into a Markov-switching regression and develop strategies for identification and estimation. Identification requires instruments, which can be found in observed exogenous variables that influence the transition probabilities of the regime-switching process, as in the so-called time-varying transition probability case. However, even with fixed transition probabilities, ...
Working Paper
Common stochastic trends, common cycles, and asymmetry in economic fluctuations
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 ...
Working Paper
The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations
Using a Bayesian model comparison strategy, we search for a volatility reduction within the post-war sample for the growth rates of U.S. aggregate and disaggregate real GDP. We find that the growth rate of aggregate real GDP has been less volatile since the early 1980s, and that this volatility reduction is concentrated in the cyclical component of real GDP. The growth rates of many of the broad production sectors of real GDP display similar reductions in volatility, suggesting the aggregate volatility reduction does not have a narrow source. We also find a large volatility reduction in ...
Working Paper
The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations
Using Bayesian tests for a structural break at an unknown break date, we search for a volatility reduction within the post-war sample for the growth rates of U.S. aggregate and disaggregate real GDP. We find that the growth rate of aggregate real GDP has been less volatile since the early 1980's, and that this volatility reduction is concentrated in the cyclical component of real GDP. The growth rates of many of the broad production sectors of real GDP display similar reductions in volatility, suggesting the aggregate volatility reduction does not have a narrow source. We also find a large ...
Working Paper
Common stochastic trends, common cycles, and asymmetry in economic fluctuations
This paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We first identify a common stochastic trend and a common transitory component by embedding the permanent income hypothesis within a simple growth model. We then investigate two types of asymmetry commonly identified in U.S. business cycle dynamics: (1) Infrequent negative permanent shocks, modeled as shifts in the growth rate of the common stochastic trend and (2) infrequent negative transitory shocks, modeled as "plucking" deviations from the common stochastic ...
Working Paper
A Bayesian approach to counterfactual analysis of structural change
In this paper, we develop a Bayesian approach to counterfactual analysis of structural change. Contrary to previous analysis based on classical point estimates, this approach provides a straightforward measure of estimation uncertainty for the counterfactual quantity of interest. We apply the Bayesian counterfactual analysis to examine the sources of the volatility reduction in U.S. real GDP growth in the 1980s. Using Blanchard and Quah?s (1989) structural VAR model of output growth and the unemployment rate, we find strong statistical support for the idea that a counterfactual change in the ...
Working Paper
The dynamic relationship between permanent and transitory components of U.S. business cycles
This paper investigates the dynamic relationship between permanent and transitory components of post-war U.S. business cycles. We specify a time-series model for real GNP and consumption in which the two share a common stochastic trend and transitory component, and Markov-regime switching is used to model business cycle phases in these components. The timing of switches between business cycle phases is allowed to differ across the permanent and transitory components. We find strong evidence of a lead-lag relationship between the switches in the two components. Specifically, switches in the ...
Working Paper
Permanent and transitory components of business cycles: their relative importance and dynamic relationship
This paper investigates the relationship between permanent and transitory components of U.S. recessions in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession for the ...