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Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components


Chang-Jin Kim


Korea University; Dept. of Economics, University of Washington

Charles R. Nelson


Dept of Economics

August 1998


Abstract:     
More than thirty years ago Milton Friedman proposed a "plucking" model of business fluctuations in which output cannot exceed a ceiling level, but will, from time to time, be plucked downward by recession. The model implied that business fluctuations are asymmetric, that recessions have only a temporary effect on output, and that recessions are duration dependent while expansions are not. Subsequent literature has provided copious empirical support for these propositions, but econometric models of business fluctuations have not incorporated these features. This paper presents a formal econometric model which encompasses both plucking and asymmetric fluctuations around a stochastic trend while allowing for heteroscedasticity and shocks to the growth rate. We find that U.S. real GDP is well characterized by Friedman's plucking model, that implied recessions correspond closely with NBER reference cycles, and no substantial role for symmetric cycles. Decomposition of the unemployment rate reveals a corresponding asymmetry and timing but with different dynamics. Time paths of the implied ceiling level of output and the trend rate of unemployment are presented.

Number of Pages in PDF File: 28

JEL Classification: E32

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Date posted: April 28, 1999  

Suggested Citation

Kim, Chang-Jin and Nelson, Charles R., Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components (August 1998). Available at SSRN: http://ssrn.com/abstract=148328 or http://dx.doi.org/10.2139/ssrn.148328

Contact Information

Chang-Jin Kim
Korea University ( email )
Anam-dong, Sungbuk-Ku
Dept. of Economics, Korea University
Seoul 136-701
Korea
HOME PAGE: http://econ.korea.ac.kr/~cjkim/
Dept. of Economics, University of Washington ( email )
Department of Economics (Box 353330)
University of Washington
Seattle, WA 98195-3330
United States
HOME PAGE: http://econ.korea.ac.kr/~cjkim/
Charles R. Nelson (Contact Author)
Dept of Economics ( email )
Box 353330
Seattle, WA 98195-3330
United States
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References:  37
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