Permanent and Transitory Components of Business Cycles: Their Relative Importance and Dynamic Relationship

45 Pages Posted: 22 Jun 2001

See all articles by Chang-Jin Kim

Chang-Jin Kim

Dept. of Economics, University of Washington

Jeremy Piger

University of Oregon - Department of Economics

Richard Startz

UCSB

Date Written: May 2001

Abstract

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 permanent component to be correlated with switches from boom to recession in the transitory component. The parameter estimates suggest a specific pattern of recessions: switches in the permanent component lead switches in the transitory component both when entering and leaving recessions.

Keywords: asymmetry, economic fluctuations, Markov-switching

JEL Classification: C32, E32

Suggested Citation

Kim, Chang-Jin and Piger, Jeremy M. and Startz, Richard, Permanent and Transitory Components of Business Cycles: Their Relative Importance and Dynamic Relationship (May 2001). Available at SSRN: https://ssrn.com/abstract=272467 or http://dx.doi.org/10.2139/ssrn.272467

Chang-Jin Kim

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 (Contact Author)

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Richard Startz

UCSB ( email )

Department of Economics
University of California
Santa Barbara, CA 93106-9210
United States
805-893-2895 (Phone)

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