Time-varying effect of uncertainty shocks on unemployment

Ozan Eksi and Bedri Kamil Onur Tas

Economic Modelling, 2022, vol. 110, issue C

Abstract: We examine the dynamic effects of uncertainty shocks on unemployment during recessions in the US. We estimate a Bayesian time-varying parameter structural vector autoregression. We analyze how the impact of uncertainty shocks on U.S. unemployment changes over time. We find that uncertainty shocks have both higher unit impact and higher total effect on unemployment during the Great Recession compared to those of previous recessions. Different characteristics of the Great Recession amplify the effect of uncertainty on unemployment. Two channels distinguish the Great Recession from other recessions: the federal funds rate hitting the zero lower bound and financial frictions. We find that these factors are significant determinants of the time-varying relationship between unemployment and uncertainty. Robustness analyses with alternative measures of uncertainty and alternative empirical specifications validate the results of the paper.

Keywords: Uncertainty shocks; Unemployment dynamics; Great recession (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:110:y:2022:i:c:s0264999322000566

DOI: 10.1016/j.econmod.2022.105810

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