Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations

39 Pages Posted: 7 Dec 2000

See all articles by Chang-Jin Kim

Chang-Jin Kim

Dept. of Economics, University of Washington

Jeremy Piger

University of Oregon - Department of Economics

Date Written: September 2000

Abstract

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 trend. Tests of marginal significance suggest both types of asymmetry were present in post-war recessions, although the shifts in trend are less severe than the received literature suggests.

Keywords: asymmetry, business cycles, common shocks, Markov-switching, productivity slowdown

Suggested Citation

Kim, Chang-Jin and Piger, Jeremy M., Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations (September 2000). Available at SSRN: https://ssrn.com/abstract=244073 or http://dx.doi.org/10.2139/ssrn.244073

Chang-Jin Kim (Contact Author)

Dept. of Economics, University of Washington ( email )

Department of Economics (Box 353330)
University of Washington
Seattle, WA 98195-3330
United States

HOME PAGE: http://https://econ.washington.edu/people/chang-jin-kim

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

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