Friedman’s ‘plucking’ model, in which output cannot exceed a ceiling
level but is occasionally plucked downward by recessions, is tested using
Kim and Nelson’s formal econometric specification on output data from
the G-7 countries. Considerable support for the model is obtained,
leading us to conclude that during normal periods, output seems to be
driven mostly by permanent shocks, but during recessions and highgrowth
recoveries, transitory shocks dominate. During these periods
macroeconomic models that emphasise demand-oriented shocks, rather
than real business cycle type models, may thus be more appropriate.
This is Business Cycle Volatility and Economic Growth Research Paper No. 00/3.
This paper forms part of the ESRC funded project (Award No. L1382511013)
“Business Cycle Volatility and Economic Growth: A Comparative Time Series
Study”, which itself is part of the Understanding the Evolving Macroeconomy