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

Giovanni Caggiano, Efrem Castelnuovo and Nicolas Groshenny

No 166, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: 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.

Keywords: Uncertainty shocks; Unemployment Dynamics; Smooth Transition Vector-AutoRegressions; Recessions. (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2013-06
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0166

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