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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
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    Handle: RePEc:pra:mprapa:53607
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    8. Antonello D'Agostino & Luca Gambetti & Domenico Giannone, 2009. "Macroeconomic Forecasting and Structural Change," Working Papers ECARES 2009_020, ULB -- Universite Libre de Bruxelles.
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    13. Sylvain Leduc & Keith Sill, 2010. "Expectations and economic fluctuations: an analysis using survey data," Working Paper Series 2010-09, Federal Reserve Bank of San Francisco.
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