Working Paper: CEPR ID: DP739
Authors: Rolf Tschernig; Klaus F. Zimmermann
Abstract: The non-stationarity of many macroeconomic time series has lead to an increased demand for economic models that are able to generate fragile equilibria. For instance, in this literature the natural unemployment rate is allowed to shift over time depending on past unemployment. Actually, many European unemployment series seem to exhibit a unit root or persistence. This view is questioned in the paper using German data on unemployment. A new class of time-series models, the fractionally integrated ARMA model, that allows the difference parameter to take real values, enables the researcher to separate long memory and short memory in the data. It is shown that using this approach the unit root hypothesis is rejected but unemployment exhibits long memory.
Keywords: unemployment; persistence; hysteresis; long memory; fractional integration
JEL Codes: C22; E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to unemployment (J64) | unemployment rate (J64) |
| unemployment rate does not exhibit true persistence (J64) | rejection of unit root hypothesis (C22) |
| long memory in unemployment series (J64) | slow adjustment process (F32) |
| shocks to unemployment (J64) | long-run effects (E65) |
| shocks to unemployment (J64) | peak impact after five quarters (C22) |