Abstract
Friedman’s ‘plucking’ model, in which output cannot exceed a ceiling level but is occasionally plucked downward by recessions, is tested using Kim and Nelson’s formal econometric specification on output data from the G-7 countries. Considerable support for the model is obtained, leading us to conclude that during normal periods, output seems to be driven mostly by permanent shocks, but during recessions and high-growth recoveries, transitory shocks dominate. During these periods macroeconomic models that emphasise demand-oriented shocks, rather than real business cycle type models, may thus be more appropriate.
This paper forms part of the ESRC funded project (Award No. L1382511013) “Business Cycle Volatility and Economic Growth; A Comparative Time Series Study”, which itself is part of the Understanding the Evolving Macroeconomy research programme. We have benefited from the comments of two anonymous referees, but all remaining errors are clearly our own.
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Mills, T.C., Wang, P. (2002). Plucking models of business cycle fluctuations: Evidence from the G-7 countries. In: Hamilton, J.D., Raj, B. (eds) Advances in Markov-Switching Models. Studies in Empirical Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-642-51182-0_6
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DOI: https://doi.org/10.1007/978-3-642-51182-0_6
Publisher Name: Physica, Heidelberg
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