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Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components

Chang-Jin Kim and Charles R. Nelson
Journal of Money, Credit and Banking
Vol. 31, No. 3, Part 1 (Aug., 1999), pp. 317-334
DOI: 10.2307/2601114
Stable URL: http://www.jstor.org/stable/2601114
Page Count: 18
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Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components
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Abstract

In Milton Friedman's model, output cannot exceed a ceiling level but occasionally is "plucked" downward by recession, implying fluctuations are asymmetric, recessions transitory, and recessions duration dependent though expansions are not. The empirical literature lends support, but formal modeling has been absent. The econometric model presented here encompasses both plucking and symmetric fluctuations around a stochastic trend. We find GDP is well characterized by the plucking model, implied recessions correspond to NBER reference cycles, and no role for symmetric cycles. Decomposition of the unemployment rate reveals a corresponding asymmetry and timing. Paths of ceiling output and trend unemployment are presented.

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