Uncertainty Shocks and Unemployment Dynamics

Malak Kandoussi () and Francois Langot
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Malak Kandoussi: University of Evry

No 13438, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Recent events suggest that uncertainty changes play a major role in U.S. labor market fluctuations. This study analyzes the impact of uncertainty shocks on unemployment dynamics. Using a vector autoregression approach, we show that uncertainty shocks measured by stock market volatility have a significant impact on the U.S. unemployment rate. We then develop a quantitative version of the Diamond-Mortensen-Pissarides (DMP) model, in which uncertainty shocks hit the economy. Given the significant nonlinearities of the DMP model, we show that the introduction of uncertainty shocks not only allows this textbook model to account for observed characteristics of the U.S. labor market dynamics, with reasonable values for calibrated parameters, but also for the impact of rare episodes such as economic crises.

Keywords: non-linearities; search and matching; unemployment dynamics; uncertainty shocks (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2020-07
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published in: Economics Letters, 2022, 201, 110760

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Journal Article: Uncertainty shocks and unemployment dynamics (2022)
Working Paper: Uncertainty shocks and unemployment dynamics (2022)
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