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Economic Policy Uncertainty and Unemployment in the United States: A Nonlinear Approach

Author

Listed:
  • Giovanni Caggiano

    (Department of Economics, Monash University; Department of Economics and Management, University of Padova; and Bank of Finland)

  • Efrem Castelnuovo

    () (Melbourne Institute: Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova)

  • Juan Manuel Figueres

    (Department of Economics and Management, University of Padova)

Abstract

We model U.S. post-WWII monthly data with a Smooth Transition VAR model and study the effects of an unanticipated increase in economic policy uncertainty on unemployment in recessions and expansions. We find the response of unemployment to be statistically and economically larger in recessions. A state-contingent forecast error variance decomposition analysis confirms that the contribution of EPU shocks to the volatility of unemployment at business cycle frequencies is markedly larger in recessions.

Suggested Citation

  • Giovanni Caggiano & Efrem Castelnuovo & Juan Manuel Figueres, 2017. "Economic Policy Uncertainty and Unemployment in the United States: A Nonlinear Approach," Melbourne Institute Working Paper Series wp2017n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2017n02
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic policy uncertainty shocks; unemployment dynamics; Smooth Transition Vector AutoRegressions; recessions; expansions;

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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