The Dynamic Relationship between Permanent and Transitory Components of U.S. Business Cycles

Chang‐Jin Kim · Jeremy Max Piger · Richard Startz

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Unemployment and Economic Growth

Abstract

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 permanent component leads switches in the transitory component when entering recessions.

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 1982Time to Build and Aggregate Fluctuations 1982Trends and random walks in macroeconmic time series 1984Testing for Unit Roots in Autoregressive-Moving Average Models of Unknown Order 1981A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the ‘business cycle’

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2010Balanced growth and the great ratios: New evidence for the US and UK 2013Econometrics: Models of Regime Changes 2009Econometrics: Models of Regime Changes 2010Factor analysis of permanent and transitory dynamics of the US economy and the stock market 2014Nonlinear Relationship Between Permanent and Transitory Components of Monetary Aggregates and the Economy

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