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Is unemployment hysteretic or structural? A Bayesian model selection approach

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  • Pedro Clavijo-Cortes

    (New Mexico Taxation and Revenue Department)

Abstract

This document estimates an unobserved components model to examine the connection between the business cycle and the natural unemployment rate in Brazil, Colombia, and Mexico. I inquire about the possibility that the unemployment rate in these countries exhibits hysteresis and its nature. The results suggest an absence of hysteresis in Colombia’s unemployment rate, supply-driven hysteresis effects in Brazil, and demand-driven hysteresis effects in Mexico. Hysteresis is defined as a dynamic structure in which the cyclical component of the unemployment rate has permanent effects on the natural component. The empirical specification is cast into a Bayesian state-space form and estimated using Markov chain Monte Carlo (MCMC) methods. The specification allows for time-varying hysteresis and stochastic volatility. I use a Bayesian model selection approach to deal with the non-regular test for the null hypothesis of no time variation in the hysteresis parameter and the variances of the innovations. Finally, the document discusses policy implications of findings regarding the degree of development in these countries.

Suggested Citation

  • Pedro Clavijo-Cortes, 2023. "Is unemployment hysteretic or structural? A Bayesian model selection approach," Empirical Economics, Springer, vol. 65(6), pages 2837-2866, December.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:6:d:10.1007_s00181-023-02433-7
    DOI: 10.1007/s00181-023-02433-7
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    More about this item

    Keywords

    Unemployment hysteresis; Unobserved components; Bayesian model selection; Stochastic volatility; Time-varying parameter;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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