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