Unemployment Persistence: Does the Size of the Shock Matter?

Bank of England Working Paper No. 50

Posted: 24 Jul 1998

See all articles by Marco Bianchi

Marco Bianchi

Citibank, N.A. - Asset Management Group, London; Bank of England

Gylfi Zoega

University of Iceland; University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Date Written: June 1996

Abstract

One of the stylized facts of unemployment is that shifts in its mean rate between decades and half-decades account for most of its variance. In this paper, the authors use a statistical analysis based on switching regression models and non-parametric density estimation techniques to identify the dates of infrequent changes in the mean of the unemployment rate series of 17 countries. They find that in most countries, unemployment persistence is small once the (infrequently) changing mean rate has been removed. The changes in the mean rate coincide with large annual changes in actual unemployment. The conclusion is that the observed persistence in unemployment appears to be consistent with unemployment hysteresis arising after large shocks to unemployment, but not after small changes. The result poses a challenge to theory, since most existing hysteresis models do not have this non-linearity property.

JEL Classification: E24, J64

Suggested Citation

Bianchi, Marco and Zoega, Gylfi, Unemployment Persistence: Does the Size of the Shock Matter? (June 1996). Bank of England Working Paper No. 50, Available at SSRN: https://ssrn.com/abstract=110248

Marco Bianchi (Contact Author)

Citibank, N.A. - Asset Management Group, London ( email )

Cottons Centre
Hays Lane
London, SE1 2QT
United Kingdom

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gylfi Zoega

University of Iceland ( email )

IS-101 Reykjavik
Iceland

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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