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Uncertainty Shocks and Unemployment Dynamics: An Analysis of Post-WWII U.S. Recessions

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Author Info

  • Giovanni Caggiano

    ()
    (University of Padova)

  • Efrem Castelnuovo

    ()
    (University of Padova)

  • Nicolas Groshenny

    ()
    (University of Adelaide)

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 suck shocks, ii) welfare costs computed by considering conditional macroeconomic volatilities, iii) 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. Our findings reinforce the relevance of the trade-off between "correctness" and "timeliness" of policy makers' decisions.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0166.

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Length: 59 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:pad:wpaper:0166

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Related research

Keywords: Uncertainty shocks; Unemployment Dynamics; Smooth Transition Vector-AutoRegressions; Recessions. Classification-JEL: C32; E32; E52.;

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Cited by:
  1. Gabriela Nodari, 2013. "Financial Regulation Policy Uncertainty and Credit Spreads in the U.S," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0170, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Ricco, Giovanni & Callegari, Giovanni & Cimadomo, Jacopo, 2014. "Signals from the Government: Policy Uncertainty and the Transmission of Fiscal Shocks," MPRA Paper 56136, University Library of Munich, Germany.
  3. Colombo, Valentina, 2013. "Economic policy uncertainty in the US: Does it matter for the Euro area?," Economics Letters, Elsevier, Elsevier, vol. 121(1), pages 39-42.

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