TY - JOUR
T1 - Nonlinearity and the permanent effects of recessions
AU - Kim, Chang Jin
AU - Morley, James
AU - Piger, Jeremy
N1 - Copyright:
Copyright 2008 Elsevier B.V., All rights reserved.
PY - 2005
Y1 - 2005
N2 - This paper presents a new nonlinear time series model that captures a post-recession 'bounce-back' in the level of aggregate output. While a number of studies have examined this type of business cycle asymmetry using recession-based dummy variables and threshold models, we relate the 'bounce-back' effect to an endogenously estimated unobservable Markov-switching state variable. When the model is applied to US real GDP, we find that the Markov-switching regimes are closely related to NBER-dated recessions and expansions. Also, the Markov-switching form of nonlinearity is statistically significant and the 'bounce-back' effect is large, implying that the permanent effects of recessions are small. Meanwhile, having accounted for the 'bounce-back' effect, we find little or no remaining serial correlation in the data, suggesting that our model is sufficient to capture the defining features of US business cycle dynamics. When the model is applied to other countries, we find larger permanent effects of recessions.
AB - This paper presents a new nonlinear time series model that captures a post-recession 'bounce-back' in the level of aggregate output. While a number of studies have examined this type of business cycle asymmetry using recession-based dummy variables and threshold models, we relate the 'bounce-back' effect to an endogenously estimated unobservable Markov-switching state variable. When the model is applied to US real GDP, we find that the Markov-switching regimes are closely related to NBER-dated recessions and expansions. Also, the Markov-switching form of nonlinearity is statistically significant and the 'bounce-back' effect is large, implying that the permanent effects of recessions are small. Meanwhile, having accounted for the 'bounce-back' effect, we find little or no remaining serial correlation in the data, suggesting that our model is sufficient to capture the defining features of US business cycle dynamics. When the model is applied to other countries, we find larger permanent effects of recessions.
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U2 - 10.1002/jae.831
DO - 10.1002/jae.831
M3 - Article
AN - SCOPUS:20744454298
VL - 20
SP - 291
EP - 309
JO - Journal of Applied Econometrics
JF - Journal of Applied Econometrics
SN - 0883-7252
IS - 2
ER -