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Unemployment Dynamics in the US and Euro
Area: Do Uncertainty Shocks Matter?
Aleksei Netˇsunajev1, Katharina Glass2
1Free ...
Motivation
Are there any effects of (economic policy) uncertainty on real
economic activity?
Mainly SVAR literature: Bloom ...
Motivation
We apply a more sophisticated approach: Bayesian
Markov-switching SVAR and identify shocks via
heteroscedastici...
SVAR
Let time evolution of an n × 1 vector yt of endogenous variables be
given by the following SVAR model:
yt = k0 + A1yt...
SVAR
The model can be written in the reduced form VAR with
time–varying volatility of innovations:
yt = k0 + A1yt−1 + . . ...
SVAR
Assumptions: (i) there are two regimes of volatility, i.e m = 2 and
(ii) the matrix B stays the same across the state...
SVAR
Orthogonal shocks may be lacking economic interpretation!
Uncertainty shock minimum requirement: a pronounced reactio...
Inference
We apply Bayesian methods for inference on all relevant model
parameters. We set up Gibbs sampler for reduced–fo...
Data
We use five dimensional VAR with
yt = [UEA
t , UUS
t , EPUEA
t , EPUUS
t , GEAt] where
UEA
t is the log of number of u...
Data
The first two variables are meant to capture the effects of interest
on the local labor market. Number of unemployed pe...
Data
Data: yt = [UEA
t , UUS
t , EPUEA
t , EPUUS
t , GEAt] . Monthly data for
1997M2 to 2014:M2
Figure: Data
1997 2002 200...
Identifying uncertainty shocks
Most of the studies use zero restrictions/recursive ordering to
identify uncertainty shocks...
Posterior regime probabilities
Figure: Posterior regime probabilities
1998: 02 2000:02 2002:02 2004:02 2006:02 2008:02 201...
Posterior of B
Figure: Prior-Posterior of B
−5 0 5
0
0.5
1
Ut
EA
−2 0 2
0
1
2
−1 0 1
0
2
4
US uncertainty shock
−1 0 1
0
5...
FEVD I
Table: Posterior means of FEVD of the EPU measures to shocks
Variable State Shock
Horizon
0 6 12
EPUEA
t
1
3 0.418 ...
Impulse responses
Figure: Impulse responses to uncertainty shocks, solid line - posterior
mean, dashed lines - 68% credibl...
FEVD II
Table: Posterior means of FEVD of the unemployment to shocks
Variable State Shock
Horizon
0 6 12
UEA
t
1
3,US 0.06...
Theory
Pure RBC (Gilchrist, Williams 2005): expansionary uncertainty
shocks cause reduction of household wealth, increase ...
Conclusions
We study the cross effects of uncertainty shocks in the two
biggest economic regions: the US and Euro Area.
The...
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Aleksei Netsunajev, Katharina Glass. Unemployment Dynamics in the US and Euro Area: Do Uncertainty Shocks Matter?

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Open Seminar, Eesti Pank
21.05.2015

Publicada em: Economia e finanças
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Aleksei Netsunajev, Katharina Glass. Unemployment Dynamics in the US and Euro Area: Do Uncertainty Shocks Matter?

  1. 1. Unemployment Dynamics in the US and Euro Area: Do Uncertainty Shocks Matter? Aleksei Netˇsunajev1, Katharina Glass2 1Free University of Berlin, 2University of Hamburg May 21, 2015 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 1/ 19
  2. 2. Motivation Are there any effects of (economic policy) uncertainty on real economic activity? Mainly SVAR literature: Bloom (2004), Baker et al (2013), Caggiano et al (2014a, b), Benati (2014), etc...; Single-country studies: uncertainty, independent of the used methods, is countercyclical and exhibits temporary negative influence on output and employment; Few papers are focused on the uncertainty spillovers so far: Colombo (2013), IMF (2013); Our interest: local and foreign effects of uncertainty shocks for the US and EA. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 2/ 19
  3. 3. Motivation We apply a more sophisticated approach: Bayesian Markov-switching SVAR and identify shocks via heteroscedasticity. We label the economic policy uncertainty shocks based on the approach of Uhlig (2004). As the measure of uncertainty we use Baker et al (2013) news-based economic policy uncertainty index (EPU) The real side of the economic regions is represented by a measure of unemployment. Caggiano et al (2014 b) explicitly analyze interaction of uncertainty and unemployment in the single country case. We reassure some negative effects of economic policy uncertainty on unemployment. Local effects of uncertainty shocks for both US and EA. Some foreign effects: US uncertainty shocks influence EA unemployment. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 3/ 19
  4. 4. SVAR Let time evolution of an n × 1 vector yt of endogenous variables be given by the following SVAR model: yt = k0 + A1yt−1 + . . . + Apyt−p + B t(st) , (1) where k0 is an intercept term, B is the instantaneous impact matrix, A1, . . . , Ap are autoregressive matrices, and t(st) is the vector of uncorrelated structural innovations that depends on the hidden state parameter st ∈ {1, . . . , m}. We assume the following distribution of t(st): t(st) ∼ Normal( 0, Λ(st) ) , where {Λ(s) : s = 1, ..., m} is a family of distinct n × n diagonal matrices and Λ(1) is normalized to identity matrix. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 4/ 19
  5. 5. SVAR The model can be written in the reduced form VAR with time–varying volatility of innovations: yt = k0 + A1yt−1 + . . . + Apyt−p + ut(st) , (2) where ut(st) = B t(st) is a vector of reduced form residuals satisfying: ut(st) | st ∼ N( 0, Σ(st) ) , where Σ(s) = BΛ(s)B is the reduced–form variance–covariance matrix in each volatility state s ∈ {1, . . . , m}. The main issue is to recover the matrix B from the family of variance–covariance matrices {Σ(s)}. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 5/ 19
  6. 6. SVAR Assumptions: (i) there are two regimes of volatility, i.e m = 2 and (ii) the matrix B stays the same across the states. Under these assumptions the following decomposition allows to back out the structural parameters of the model: Σ(1) = BB , Σ(2) = B Λ(2)B . Two regimes MS models allows for a rich patterns in volatility while regime independent B is standard for structural VAR models. In the related literature the models of Caggiano et al (2014a, b) can be interpreted as models with two (extreme) regimes Aleksei Netˇsunajev, Katharina Glass Eesti Pank 6/ 19
  7. 7. SVAR Orthogonal shocks may be lacking economic interpretation! Uncertainty shock minimum requirement: a pronounced reaction of uncertainty variable at least on impact To find a suitable label for a shock we examine impact effects and forecast error variance decompositions: Verify whether there are some shocks that can qualify as uncertainty shocks i.e. satisfy the minimum requirement. Do the qualified shocks explain maximum of the forecast error variance of the uncertainty variable? Yes - labeling is confirmed! (Uhlig (2004)). Aleksei Netˇsunajev, Katharina Glass Eesti Pank 7/ 19
  8. 8. Inference We apply Bayesian methods for inference on all relevant model parameters. We set up Gibbs sampler for reduced–form VAR parameters with the following steps: 1. Draw unobserved vector ST using algorithm of Chib (1996); 2. Draw elements of Markov transition matrix P; 3. Draw covariance matrices Σ(s), s ∈ {1, 2}; 4. Decompose Σ(s), s ∈ {1, 2} into B and Λ(2) 5. Draw VAR parameters See details on Gibbs sampler in Kulikov, Netˇsunajev (2013). Aleksei Netˇsunajev, Katharina Glass Eesti Pank 8/ 19
  9. 9. Data We use five dimensional VAR with yt = [UEA t , UUS t , EPUEA t , EPUUS t , GEAt] where UEA t is the log of number of unemployed people in the EA (month-on month growth rate) UUS t is the log of number of unemployed people in the US (month-on month growth rate) EPUEA t is the log of measure of the economic policy uncertainty in the EA (demeaned) EPUUS t is the log of measure of the economic policy uncertainty in the US (demeaned) GEAt is the index of global real economic activity. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 9/ 19
  10. 10. Data The first two variables are meant to capture the effects of interest on the local labor market. Number of unemployed people in the EA is published by the ECB, number of unemployed people in the US comes from the Bureau of Labor Statistics. The economic policy uncertainty measures are region specific and come from http://www.policyuncertainty.com. The European news-based EPU index encompasses Germany, Spain, France, Italy. Since these countries account for about 80% to the total Euro area GDP their uncertainty contribution is a suitable proxy for the whole Euro area uncertainty. The last variable in the VAR is the index of global real economic activity (GEA), which controls for possible global effects. It is introduced by Kilian (2009) to reflect shifts in the demand for industrial commodities on global market. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 10/ 19
  11. 11. Data Data: yt = [UEA t , UUS t , EPUEA t , EPUUS t , GEAt] . Monthly data for 1997M2 to 2014:M2 Figure: Data 1997 2002 2007 2012 −3 −2 −1 0 1 2 3 4 5 6 Ut EA 1997 2002 2007 2012 −8 −6 −4 −2 0 2 4 6 8 10 Ut US 1997 2002 2007 2012 −1 −0.5 0 0.5 1 1.5 EPUt EA 1997 2002 2007 2012 −1 −0.5 0 0.5 1 1.5 EPUt US 1997 2002 2007 2012 −60 −40 −20 0 20 40 60 GEAt Aleksei Netˇsunajev, Katharina Glass Eesti Pank 11/ 19
  12. 12. Identifying uncertainty shocks Most of the studies use zero restrictions/recursive ordering to identify uncertainty shocks. Real side of the economy reacts to uncertainty shocks within a lag of at least one month. Benati (2014): impact and sign restrictions, but non-negligible role of uncertainty shocks is documented for identification based Uhlig (2004) approach. Caggiano (2014b): use quarterly data and allow for possible impact effects of uncertainty shocks (order the uncertainty measure first in the VAR). We want to jointly model several economic regions hence conventional restriction are more problematic. Identification via changes in volatility is useful because it does not impose any distortions on impact effects of shocks and allows to analyze both US and EA uncertainty shocks identified under the same conditions. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 12/ 19
  13. 13. Posterior regime probabilities Figure: Posterior regime probabilities 1998: 02 2000:02 2002:02 2004:02 2006:02 2008:02 2010:02 2012:02 2014:02 0 0.5 1 State 1 1998:02 2000:02 2002:02 2004:02 2006:02 2008:02 2010:02 2012:02 2014:02 0 0.5 1 State 2 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 13/ 19
  14. 14. Posterior of B Figure: Prior-Posterior of B −5 0 5 0 0.5 1 Ut EA −2 0 2 0 1 2 −1 0 1 0 2 4 US uncertainty shock −1 0 1 0 5 10 EA uncertainty shock −1 0 1 0 5 10 −4 −2 0 2 4 0 0.2 0.4 Ut US −2 0 2 4 0 0.5 1 −2 0 2 0 0.5 1 −2 0 2 0 1 2 −2 0 2 0 1 2 −0.5 0 0.5 0 5 10 EPUt EA −1 0 1 0 5 10 −0.5 0 0.5 1 0 5 −0.5 0 0.5 0 5 10 −0.5 0 0.5 0 5 10 −0.5 0 0.5 0 5 10 EPUt US −1 0 1 0 5 10 −0.5 0 0.5 0 5 10 −0.5 0 0.5 0 10 20 −0.1 0 0.1 0 20 40 −10 0 10 20 30 0 0.1 0.2 GEAt −20 0 20 0 0.2 0.4 −10 0 10 0 0.5 −5 0 5 0 0.5 1 −5 0 5 0 0.5 1 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 14/ 19
  15. 15. FEVD I Table: Posterior means of FEVD of the EPU measures to shocks Variable State Shock Horizon 0 6 12 EPUEA t 1 3 0.418 0.459 0.459 4 0.280 0.185 0.158 1,2,5 0.302 0.355 0.382 2 3 0.248 0.335 0.360 4, 0.446 0.365 0.338 1,2,5 0.306 0.300 0.203 EPUUS t 1 3 0.681 0.607 0.569 4 0.047 0.051 0.050 1,2,5 0.272 0.342 0.381 2 3 0.733 0.664 0.638 4 0.101 0.120 0.126 1,2,5 0.166 0.216 0.236 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 15/ 19
  16. 16. Impulse responses Figure: Impulse responses to uncertainty shocks, solid line - posterior mean, dashed lines - 68% credible sets 0 12 24 36 −0.4 −0.2 0 0.2 0.4 USuncertainty shock U t EA 0 12 24 36 −0.5 0 0.5 1 U t US 0 12 24 36 0 0.1 0.2 0.3 0.4 EPU t EA 0 12 24 36 0 0.1 0.2 0.3 EPU t US 0 12 24 36 −6 −4 −2 0 GEA t 0 12 24 36 −0.2 −0.1 0 0.1 0.2 0.3 EAuncertainty shock 0 12 24 36 −2 −1 0 1 2 0 12 24 36 0 0.1 0.2 0.3 0 12 24 36 −0.1 −0.05 0 0.05 0.1 0 12 24 36 −2 −1 0 1 2 3 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 16/ 19
  17. 17. FEVD II Table: Posterior means of FEVD of the unemployment to shocks Variable State Shock Horizon 0 6 12 UEA t 1 3,US 0.063 0.075 0.095 4,EA 0.008 0.013 0.016 1,2,5 0.929 0.912 0.889 2 3,US 0.111 0.136 0.177 4,EA 0.055 0.090 0.104 1,2,5 0.833 0.774 0.719 UUS t 1 3,US 0.099 0.125 0.128 4,EA 0.188 0.151 0.144 1,2,5 0.714 0.724 0.728 2 3,US 0.047 0.069 0.073 4,EA 0.266 0.258 0.257 1,2,5 0.687 0.673 0.670 Aleksei Netˇsunajev, Katharina Glass Eesti Pank 17/ 19
  18. 18. Theory Pure RBC (Gilchrist, Williams 2005): expansionary uncertainty shocks cause reduction of household wealth, increase in marginal utility of consumption and labor supply. Sticky prices and search frictions (Leduc, Liu (2014)): Under nominal rigidities uncertainty shock has a multiplier effect. Reduction of aggregate demand lowers relative prices. As the firms post fewer vacancies, unemployment rate increases and household income decreases. In the model with search frictions if uncertainty increases, the present value of a job match declines and the unemployment rises. Our result tend to support latter two theoretical standpoints. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 18/ 19
  19. 19. Conclusions We study the cross effects of uncertainty shocks in the two biggest economic regions: the US and Euro Area. The shocks are statistically identified via changes in their volatility. The economic labeling of ”US uncertainty” and ”EA uncertainty” shocks is succeeded via the maximum explained variance. We reassure negative effects of economic policy uncertainty on unemployment. The increase in the US economic policy uncertainty tends to increase the unemployment in the Euro area, but no effect from the EA uncertainty to US labor market is observed. Higher economic policy uncertainty in the US also tends to dampen the global real economic activity. We document that the influence of uncertainty shocks, both local and foreign, is stronger in less volatile times. Aleksei Netˇsunajev, Katharina Glass Eesti Pank 19/ 19

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