Is unemployment hysteretic or structural? A Bayesian model selection approach

Pedro Clavijo

Empirical Economics, 2023, vol. 65, issue 6, No 11, 2837-2866

Abstract: Abstract This document estimates an unobserved components model to examine the connection between the business cycle and the natural unemployment rate in Brazil, Colombia, and Mexico. I inquire about the possibility that the unemployment rate in these countries exhibits hysteresis and its nature. The results suggest an absence of hysteresis in Colombia’s unemployment rate, supply-driven hysteresis effects in Brazil, and demand-driven hysteresis effects in Mexico. Hysteresis is defined as a dynamic structure in which the cyclical component of the unemployment rate has permanent effects on the natural component. The empirical specification is cast into a Bayesian state-space form and estimated using Markov chain Monte Carlo (MCMC) methods. The specification allows for time-varying hysteresis and stochastic volatility. I use a Bayesian model selection approach to deal with the non-regular test for the null hypothesis of no time variation in the hysteresis parameter and the variances of the innovations. Finally, the document discusses policy implications of findings regarding the degree of development in these countries.

Keywords: Unemployment hysteresis; Unobserved components; Bayesian model selection; Stochastic volatility; Time-varying parameter (search for similar items in EconPapers)
JEL-codes: C32 E24 O54 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-023-02433-7

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