Working Paper: CEPR ID: DP13370
Authors: Leonardo Melosi; Renato Faccini
Abstract: Low-frequency variations in current and expected unemployment rates are important to identify TFP news shocks and to allow a general equilibrium rational expectations model to generate Pigouvian cycles: a large fraction of the comovement of output, consumption, investment, employment, and real wages is explained by changes in expectations unrelated to TFP fundamentals. The model predicts that the start (end) of most U.S. recessions is associated with agents realizing that previous enthusiastic (lukewarm) expectations about future TFP would not be met.
Keywords: Identification of shocks; TFP news; Noise shocks; The Great Recession; Bayesian estimation; Labor market trends; Employment gap
JEL Codes: C11; C51; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment rates (J64) | TFP news shocks (F38) |
| TFP news shocks (F38) | output (C67) |
| TFP news shocks (F38) | consumption (E21) |
| TFP news shocks (F38) | investment (G31) |
| TFP news shocks (F38) | employment (J68) |
| unemployment rates (J64) | dynamics of output, consumption, investment, and employment (E20) |
| noise shocks (R41) | business cycles (E32) |
| noise shocks (R41) | boom-bust patterns in macroeconomic aggregates (E32) |
| TFP news shocks (F38) | variability in unemployment rates (J64) |