Expectation-Driven Cycles: Time-Varying Effects

34 Pages Posted: 2 Apr 2015

See all articles by Antonello D'Agostino

Antonello D'Agostino

European Stability Mechanism; Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Date Written: April 2, 2015

Abstract

This paper provides new insights into expectation-driven cycles by estimating a structural VAR with time-varying coefficients and stochastic volatility, as in Cogley and Sargent (2005) and Primiceri (2005). We use survey-based expectations of the unemployment rate to measure expectations of future developments in economic activity. We find that the effect of expectation shocks on the realized unemployment rate have been particularly large during the most recent recession. Unanticipated changes in expectations contributed to the gradual increase in the persistence of the unemployment rate and to the decline in the correlation between the inflation and the unemployment rate over time. Our results are robust to the introduction of financial variables in the model.

Keywords: survey expectations, economic fluctuations, stochastic volatility, time varying vector autoregression

JEL Classification: C32, E24, E32

Suggested Citation

D'Agostino, Antonello and Mendicino, Caterina, Expectation-Driven Cycles: Time-Varying Effects (April 2, 2015). ECB Working Paper No. 1776. Available at SSRN: https://ssrn.com/abstract=2588992

Antonello D'Agostino (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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