We propose a generalization of existing business cycle models which allows us to decompose recessions into permanent and transitory components. We find that the transitory component of recessions accounts for between 77% and 96% of the observed variance of monthly indicator series. Our results suggest the following three phase characterization of the business cycle: recession, high-growth recovery during which output partially reverts to its previous peak, and normal growth following the recovery. In addition, we find significant timing differences between the permanent and transitory components of recessions; most notably the lack of the usual high-growth recovery phase following the 1990-91 recession. JEL Codes: C32, E32 Kim: Department of Economics, Korea University, Seoul, 136-701, Korea (cjkim@kuccnx.korea.ac.kr); Murray: (Corresponding author) Department of Economics, University of Houston, Houston, TX 77204-5882 (cjmurray@uh.edu), Tel: 713-743-3835, Fax: 713-743-3798 1 1. In...

The last ten years have witnessed the development of sampling frameworks that permit the construction of Markov chains which simultaneously traverse both parameter and model space. In this time substantial methodological progress has been made. In this article we present a survey of the current state of the art and evaluate some of the most recent advances in this field. We also discuss future research perspectives in the context of the drive to develop sampling mechanisms with high degrees of both efficiency and automation. 1

This paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We first identify a common stochastic trend and a common transitory component by imbedding the permanent income hypothesis within a simple growth model. We then investigate two types of asymmetry commonly identified in U.S. business cycle dynamics: 1. Infrequent negative permanent shocks, modeled as shifts in the growth rate of the common stochastic trend and 2. Infrequent negative transitory shocks, modeled as "plucking " deviations from the common stochastic trend. Tests of marginal significance suggest both types of asymmetry were present in post-war recessions, although the shifts in trend are less severe than the received literature suggests.

The mixture model likelihood function is invariant with respect to permutation of the components of the mixture. If functions of interest are permutation sensitive, as in classification applications, then interpretation of the likelihood function requires valid inequality constraints and a very large sample may be required to resolve ambiguities. If functions of interest are permutation invariant, as in prediction applications, then there are no such problems of interpretation. Contrary to assessments in some recent publications, simple and widely used Markov chain Monte Carlo (MCMC) algorithms with data augmentation reliably recover the entire posterior distribution. 1 1

In this paper, we apply a Bayesian approach to test for a structural break with unknown breakpoint in an empirical model of excess returns that allows the equity premium to change in response to recurrent changes in the level of volatility. The main questions we seek to answer with our approach are the following: Is there evidence of changes in the equity premium over time? If so, can these changes be explained as the consequence of recurrent changes in the level of volatility? Or, alternatively, does the equity premium undergo a one-time permanent structural break? For monthly excess returns on a value-weighted portfolio of NYSE stocks between 1926-1991, we find strong evidence for a structural break in the Markov-switching variance process around 1941. However, the data provide little evidence of a concurrent structural break in the equity premium. Instead, the data suggest that changes in the equity premium are mainly a consequence of recurrent changes in the level of volatility. Ke...

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This paper investigates the relationship between permanent and transitory components of U.S. output in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession in the permanent component to be correlated with switches from boom to recession in the transitory component. The parameter estimates suggest a specific pattern of recessions: switches in the permanent component lead switches in the transitory component both when entering and leaving recessions.

Many macroeconomic time series involve a threshold e¤ect in their ARMA representation. In this paper we introduce a new class of threshold ARFIMA models. The threshold is introduced in the autoregressive and/or the fractional integration parameters of the usual ARFIMA(p,d,q) model. We use two marginal and a joint LM-type test. Monte Carlo experiments demonstrate the desirable …nite sample power and size of the test and the improvement of its accuracy when using the exact maximum likelihood estimator of the long term parameter (Sowell (1992)). Simulations show also that the joint test has tractable properties when a threshold effect is present in the short memory and the long memory dynamics of the series. This joint test has the advantage of detecting individual threshold e¤ects and giving a de…nite decision about the rejection or not of the null of no threshold e¤ect. The methodology is applied to seven US macroeconomic time series including the US real GNP growth rate, and we …nd that a threshold e¤ect in the parameters of the ARFIMA(p,d,q) model is a common property for many US macroeconomic data.

The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Photo courtesy of The Gateway Arch, St. Louis, MO. www.gatewayarch.comCommon stochastic trends, common cycles, and asymmetry in economic fluctuations

Abstract: In this paper we examine the existence of regional business cycles within aggregate WAEMU 2 countries and individual countries as well, using a Markov switching model and the Gibbs sampling method.The findings suggest that the aggregate WAEMU’s GDP exhibits growth rate that is different from national economies.The aggregate cycle can be characterized, according to its mean duration, as a Kuznets type cycle lasting from 15 to 25 years.The aggregate GDP growth rate is above all the individual countries GDP growth rate.