A plucking model of business cycles

Stéphane Dupraz, Emi Nakamura and Jón Steinsson

Journal of Monetary Economics, 2025, vol. 152, issue C

Abstract: In standard models, economic activity fluctuates symmetrically around a “natural rate” and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view – labeled the “plucking model” by Milton Friedman – is that economic fluctuations are drops below the economy’s full potential ceiling. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of a decrease does not predict the amplitude of the following increase. In addition, business cycles last seven years on average and unemployment rises much faster during recessions than it falls during expansions. We augment a standard labor search model with downward nominal wage rigidity and show how it can fit the plucking property.

Keywords: Downward Nominal Rigidity; Stabilization Policy; Labor Search (search for similar items in EconPapers)
JEL-codes: E24 E30 E52 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: A Plucking Model of Business Cycles (2020)
Working Paper: A Plucking Model of Business Cycles (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:152:y:2025:i:c:s0304393225000376

DOI: 10.1016/j.jmoneco.2025.103766

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