Uncertainty Shocks and Unemployment Dynamics in U.S. Recessions

Caggiano, Giovanni; Castelnuovo, Efrem; Groshenny, Nicolas

doi:10.2139/ssrn.2437769

Uncertainty Shocks and Unemployment Dynamics in U.S. Recessions

Melbourne Institute Working Paper No. 12/14

60 Pages Posted: 16 May 2014

See all articles by Giovanni Caggiano

Giovanni Caggiano

Department of Economics, Monash University; University of Padova

Efrem Castelnuovo

University of Melbourne - Department of Economics; University of Padova - Department of Economics

Nicolas Groshenny

Reserve Bank of New Zealand; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: May 2014

Abstract

We investigate the effects of uncertainty shocks on unemployment dynamics in the post-WWII U.S. recessions via non-linear (Smooth-Transition) VARs. The relevance of uncertainty shocks is found to be much larger than that predicted by standard linear VARs in terms of (i) magnitude of the reaction of the unemployment rate to such shocks, and (ii) contribution to the variance of the prediction errors of unemployment at business cycle frequencies. We discuss the ability of different classes of DSGE models to replicate our results.

Keywords: Uncertainty shocks, unemployment dynamics, Smooth Transition Vector-AutoRegressions, recessions

JEL Classification: C32, E32, E52

Suggested Citation: Suggested Citation

Caggiano, Giovanni and Castelnuovo, Efrem and Groshenny, Nicolas, Uncertainty Shocks and Unemployment Dynamics in U.S. Recessions (May 2014). Melbourne Institute Working Paper No. 12/14, Available at SSRN: https://ssrn.com/abstract=2437769 or http://dx.doi.org/10.2139/ssrn.2437769