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Expectation-Driven Cycles: Time-varying Effects

  • D'Agostino, Antonello
  • Mendicino, Caterina
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    This paper provides new insights into expectation-driven cycles by estimating a structural VAR with time-varying coefficients and stochastic volatility. We use survey-based expectations of the unemployment rate to measure expectations of future developments in economic activity. We find that the effect of expectation shocks on the realized unemployment rate have been particularly large during the most recent recession. Unanticipated changes in expectations contributed to the gradual increase in the persistence of the unemployment rate and to the decline in the correlation between the inflation and the unemployment rate over time. Our results are robust to the introduction of financial variables in the model.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53607.

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    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:pra:mprapa:53607
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    1. Luca Gambetti & Jordi Galí, 2007. "On the sources of the Great Moderation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    2. Olivier Coibion & Yuriy Gorodnichenko, 2013. "Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation," NBER Working Papers 19598, National Bureau of Economic Research, Inc.
    3. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    4. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
    5. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
    6. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 337-405.
    7. D'Agostino, Antonello & Gambetti, Luca & Giannone, Domenico & Giannone, Domenico, 2009. "Macroeconomic Forecasting and Structural Change," Research Technical Papers 8/RT/09, Central Bank of Ireland.
    8. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
    9. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 61-103.
    10. Sylvain Leduc & Keith Sill, 2010. "Expectations and economic fluctuations: an analysis using survey data," Working Papers 10-6, Federal Reserve Bank of Philadelphia.
    11. Coibion, Olivier & Gorodnichenko, Yuriy & Koustas, Dmitri, 2013. "Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence," IZA Discussion Papers 7715, Institute for the Study of Labor (IZA).
    12. Robert B. Barsky & Eric R. Sims, 2009. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," NBER Working Papers 15049, National Bureau of Economic Research, Inc.
    13. 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.
    14. repec:oup:qjecon:v:115:y:2000:i:1:p:147-180 is not listed on IDEAS
    15. repec:oup:qjecon:v:129:y:2013:i:1:p:61-103 is not listed on IDEAS
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