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The time-varying Beveridge curve

  • Luca Benati
  • Thomas A. Lubik

We use a Bayesian time-varying parameter structural VAR with stochastic volatility to investigate changes in both the reduced-form relationship between vacancies and the unemployment rate, and in their relationship conditional on permanent and transitory output shocks, in the post-WWII United States. Evidence points towards similarities and differences between the Great Recession and the Volcker disinflation, and wide-spread time variation along two key dimensions. First, the slope of the Beveridge curve exhibits a large extent of variation from the mid-1960s on. It is also notably pro-cyclical, whereby the gain is positively correlated with the transitory component of output. The evolution of the slope of the Beveridge curve during the Great Recession is very similar to its evolution during the Volcker recession in terms of both its magnitude and its time profile. Second, both the Great Inflation episode and the subsequent Volcker disinflation are characterized by a significantly larger negative correlation between the reduced-form innovations to vacancies and the unemployment rate than the rest of the sample period. Those years also exhibit a greater cross-spectral coherence between the two series at business-cycle frequencies. This suggests that they are driven by common shocks.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-12.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-12
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  1. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models: Comments: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 413-17, October.
  2. Timothy Cogley & Thomas Sargent, . "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US," Working Papers 2133503, Department of Economics, W. P. Carey School of Business, Arizona State University.
  3. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 371-89, October.
  4. Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  5. Nicolas Groshenny & Francesco Furlanetto, 2013. "Mismatch Shocks and Unemployment During the Great Recession," School of Economics Working Papers 2013-09, University of Adelaide, School of Economics.
  6. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  7. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
  8. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  9. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  10. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
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