A floor and ceiling model of US output

Building on previous nonlinear time-series models we further examine the form of nonlinearity in US output. We develop a model of US output that allows for floor and ceiling effects to alter the dynamics of output growth. The model estimated on post-Korean War quarterly data, displays features similar to nonlinear trade cycle models of the 1940s and 1950s. Thus, as predicted by many of the earlier theoretical models, our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process. We also find important asymmetries in the responses of output to positive and negative shocks. This history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of Real Business Cycle theory.