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While a number of studies have examined this type of business cycle asymmetry using recession\u2010based dummy variables and threshold models, we relate the \u2018bounce\u2010back\u2019 effect to an endogenously estimated unobservable Markov\u2010switching state variable. When the model is applied to US real GDP, we find that the Markov\u2010switching regimes are closely related to NBER\u2010dated recessions and expansions. Also, the Markov\u2010switching form of nonlinearity is statistically significant and the \u2018bounce\u2010back\u2019 effect is large, implying that the permanent effects of recessions are small. Meanwhile, having accounted for the \u2018bounce\u2010back\u2019 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. Copyright \u00a9 2005 John Wiley &amp; Sons, Ltd.<\/jats:p>","DOI":"10.1002\/jae.831","type":"journal-article","created":{"date-parts":[[2005,3,24]],"date-time":"2005-03-24T18:47:40Z","timestamp":1111690060000},"page":"291-309","source":"Crossref","is-referenced-by-count":122,"title":["Nonlinearity and the permanent effects of recessions"],"prefix":"10.1002","volume":"20","author":[{"given":"Chang\u2010Jin","family":"Kim","sequence":"first","affiliation":[],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"James","family":"Morley","sequence":"additional","affiliation":[],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Jeremy","family":"Piger","sequence":"additional","affiliation":[],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"311","published-online":{"date-parts":[[2005,3,24]]},"reference":[{"key":"e_1_2_11_2_1","doi-asserted-by":"publisher","DOI":"10.1016\/0304-3932(93)90042-E"},{"key":"e_1_2_11_3_1","doi-asserted-by":"publisher","DOI":"10.2307\/3585159"},{"key":"e_1_2_11_4_1","doi-asserted-by":"publisher","DOI":"10.2202\/1558-3708.1010"},{"key":"e_1_2_11_5_1","unstructured":"BryG BoschanC.1971.Cyclical analysis of time series: selected procedures and computer programs. 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