Uncertainty Shocks and Unemployment Dynamics in U.S. Recessions
60 Pages Posted: 16 May 2014
Date Written: May 2014
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
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