Permanent and Transitory Components of Business Cycles: Their Relative Importance and Dynamic Relationship
45 Pages Posted: 22 Jun 2001
Date Written: May 2001
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: Suggested Citation