Working Paper: CEPR ID: DP2475
Authors: Filippo Altissimo; Giovanni L. Violante
Abstract: This paper studies the joint dynamics of US output and unemployment rates in a nonlinear VAR model. The nonlinearity is introduced through a feedback variable that endogenously augments the output lags of the VAR in recessionary phases. Sufficient conditions for the ergodicity of the model, potentially applying to a larger class of threshold models, are provided. The linear specification is severely rejected in favour of our threshold VAR. However, in the estimation the feedback is found to be statistically significant only on unemployment, while it transmits to output through its cross-correlation. This feedback effect from recessions generates important asymmetries in the propagation of shocks, a possible key to interpret the divergence in the measures of persistence existing in the literature. The regime-dependent persistence also explains the finding that the feedback from recession exerts a positive effect on the long-run growth rate of the economy, an empirical validation for the Schumpeterian macroeconomic theories.
Keywords: nonlinearity; threshold VAR; ergodicity; impulse-response function; persistence; long-run effect of recessions
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| feedback from recession (E32) | unemployment (J64) |
| feedback from recession (E32) | output (C67) |
| recession (E32) | long-run economic growth (O49) |
| negative shocks (F69) | long-run persistence (E32) |
| positive shocks (E32) | long-run persistence (E32) |