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The Dynamic Relationship between Permanent and Transitory Components of U.S. Business Cycles
Author(s) -
KIM CHANGJIN,
PIGER JEREMY M.,
STARTZ RICHARD
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.0022-2879.2007.00008.x
Subject(s) - business cycle , component (thermodynamics) , recession , markov chain , econometrics , consumption (sociology) , economics , computer science , macroeconomics , social science , physics , machine learning , sociology , thermodynamics
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.