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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
    as

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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2017n02.pdf
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    References listed on IDEAS

    as
    1. Nodari, Gabriela, 2014. "Financial regulation policy uncertainty and credit spreads in the US," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 122-132.
    2. Markku Lanne & Henri Nyberg, 2016. "Generalized Forecast Error Variance Decomposition for Linear and Nonlinear Multivariate Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 595-603, August.
    3. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1593-1636.
    4. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
    5. Scott R. Baker & Nicholas Bloom & Brandice Canes-Wrone & Steven J. Davis & Jonathan Rodden, 2014. "Why Has US Policy Uncertainty Risen since 1960?," American Economic Review, American Economic Association, vol. 104(5), pages 56-60, May.
    6. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    7. Timo Teräsvirta & Yukai Yang, 2014. "Linearity and Misspecification Tests for Vector Smooth Transition Regression Models," CREATES Research Papers 2014-04, Department of Economics and Business Economics, Aarhus University.
    8. Matteo Cacciatore, 2015. "Uncertainty and the Business Cycle," 2015 Meeting Papers 1440, Society for Economic Dynamics.
    9. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    10. ., 2015. "Income distribution and the business cycle," Chapters, in: The New Economics of Income Distribution, chapter 5, pages 96-122, Edward Elgar Publishing.
    11. Fleissig, 2015. "Changes in aggregate food demand over the business cycle," Applied Economics Letters, Taylor & Francis Journals, vol. 22(17), pages 1366-1371, November.
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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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