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Does the US and Canada have a common nonlinear cycle in unemployment?

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Author Info
R. Paap ()
Ph.H.B.F. Franses () (FEW-Econometrie en besliskunde)

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Abstract

To enable answering the question in the title, we introduce a bivariate censored latent effects autoregression, and discuss representation, parameter estimation, diagnostics and inference. We show that this bivariate nonlinear model is very useful for examining common nonlinearity. We apply the model to the monthly unemployment rate in the US and Canada to examine if these variables have common cyclical properties conditional on lagged explanatory variables such as industrial production, the oil price and interest spread. We find that US variables have explanatory value for Canadian unemployment, but that Canadian variables do not predict cyclical patterns in the US. Also, we find that recessionary shocks in Canada are more persistent than similar sized shocks in the US in the same period. Finally, we obtain some evidence for a common nonlinear business cycle.

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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number 108.

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Date of creation: 1999
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Handle: RePEc:dgr:eureir:1999108

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Related research
Keywords: nonlinear time series censored regression persistence common nonlinearity;

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  1. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295. [Downloadable!] (restricted)
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  2. Boswijk, H.P. & Franses, P.H., 1997. "Common Persistence in Nonlinear Autoregressive Models," Papers 9702/a, Erasmus University of Rotterdam - Econometric Institute.
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  3. Diebold, Francis X & Rudebusch, Glenn D, 1996. "Measuring Business Cycles: A Modern Perspective," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 67-77, February. [Downloadable!] (restricted)
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  4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  5. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
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  6. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 283-304. [Downloadable!]
  7. Franses, Ph.H.B.F. & Paap, R., 1998. "Censored latent effects autoregression, with an application to US unemployment," Econometric Institute Report EI 9841 Revision_Date: 20, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
  8. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc. [Downloadable!]
  9. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April. [Downloadable!] (restricted)
  10. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December. [Downloadable!] (restricted)
  11. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July. [Downloadable!] (restricted)
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  1. Franses, Ph.H.B.F. & Paap, R. & Sijthoff, Ph.A., 2001. "Modeling Potentially Time-Varying Effects of Promotions on Sales," Research Paper ERS-2001-05-MKT Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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