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

Chang-Jin Kim () and Charles Nelson

Discussion Papers in Economics at the University of Washington from Department of Economics at the University of Washington

Abstract: More than thirty years ago Milton Friedman proposed a 'plucking' model of business fluctuations in which output cannot exceed a ceiling level, but will, from time to time, be plucked downward by recession. The model implied that business fluctuations are asymmetric, that recessions have only a temporary effect on output, and that recessions are duration dependent while expansions are not. Subsequent literature has provided copious empirical support for these propositions, but econometric models of business fluctuations have not incorporated these features. This paper presents a formal econometric model which encompasses both plucking and asymmetric fluctuations around a stochatic trend while allowing for heteroskedasticity and shocks to the growth rate.

Keywords: ECONOMIC MODELS; ECONOMETRICS; BUSINESS CYCLES; ECONOMIC GROWTH (search for similar items in EconPapers)
JEL-codes: C51 E32 O41 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1997
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Journal Article: Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components (1999)
Working Paper: Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:washer:97-06

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