Uncertainty and the Great Recession

Has heightened uncertainty been a major contributor to the Great Recession and the slow recovery in the United States? To answer this question, we identify exogenous changes in six uncertainty proxies and quantify their contributions to GDP growth and the unemployment rate. The answer is no. In total we find that increased macroeconomic and financial uncertainty can explain up to 10% of the drop in GDP at the height of the recession and up to 0.6 percentage points of the increased unemployment rates in 2009 through 2011. Our calculations further suggest that only a minor part of the rise in popular uncertainty measures during the Great Recession was driven by exogenous uncertainty shocks.     

What drives fluctuations in exchange rate growth in emerging markets – A multi-level dynamic factor approach

Historically, exchange rates in many emerging economies have been volatile. We use a dynamic hierarchical factor model to investigate the driving forces behind these fluctuations in exchange rate growth and find that in recent years, especially since the Great Recession, the common (world) factor has become more important. We also find that, since 2009, US monetary policy and Chinese economic growth have had much greater effects on emerging market exchange rate growth fluctuations. The historical decomposition indicates that 18.8% and 23% of the variations in the world factor after 2009 can be explained by US monetary policy shock and Chinese industrial production shock, respectively.     

Decomposing Beveridge Curve Dynamics By Correlated Unobserved Components

Our paper provides a consistent framework to study the structural or cyclical nature of Beveridge curve (BC) dynamics: We connect equilibrium unemployment theory to a flexible multivariate unobserved components model. We disentangle permanent and transitory components of all series determining the BC and its position. Cointegration and identification are addressed. The German curve is an ideal illustration as reforms of the institutional setting and the Great Recession were accompanied by a remarkable labour market development. We find an extraordinary increase in trend matching efficiency after the reforms, which testifies to a permanent improvement. Matching efficiency accounts for about half of the BC? inward shift. As tightness also increased, a persistent upward movement masked the inward shift.     

Estimating the U.S. output gap with state‐level data

This paper develops a method to estimate the U.S. output gap by exploiting the cross‐sectional variation of state‐level output and unemployment rate data. The model assumes that there are common output and unemployment rate trend and cycle components, and that each state's output and unemployment rate are subject to idiosyncratic trend and cycle perturbations. I estimate the model with Bayesian methods using quarterly data from 2005:Q1 to 2018:Q2 for the 50 states and the District of Columbia. Results show that the U.S. output gap reached about negative 4.6% around the years of the Great Recession and was about 0.9% in 2018:Q2.     

Unemployment shocks and material deprivation in the European Union: A synthetic control approach

This paper analyzes how material deprivation responds to drastic changes in unemployment levels. We explore unemployment shocks registered in some European Union countries during the so-called Great Recession. To do so, we apply the synthetic control methodology, which has been rarely used in the field of distributive analyses. We use this approach to identify the impact of unemployment shocks on material deprivation and conduct different sensitivity analyses to test the results. We find that contrary to the traditional assumption of the low sensitivity of material deprivation measures to changes in the economic cycle, unemployment shocks have a significant and rapid impact on material deprivation. This conclusion holds even when extending the period of analysis, changing the indicator of material deprivation, or modifying the definition of unemployment shock.     

Mismatch and the Forecasting Performance of Matching Functions

This paper investigates the role of structural imbalance between job seekers and job openings for the forecasting performance of a labour market matching function. Starting from a Cobb–Douglas matching function with constant returns to scale (CRS) in each frictional micro market shows that on the aggregate level, a measure of mismatch is a crucial ingredient of the matching function and hence should not be ignored for forecasting hiring figures. Consequently, we allow the matching process to depend on the level of regional, qualificatory and occupational mismatch between unemployed and vacancies. In pseudo out‐of‐sample tests that account for the nested model environment, we find that forecasting models enhanced by a measure of mismatch significantly outperform their benchmark counterparts for all forecast horizons ranging between one month and a year. This is especially pronounced during and in the aftermath of the Great Recession where a low level of mismatch improved the possibility of unemployed to find a job again. The results show that imposing CRS helps improve forecast accuracy compared to unrestricted models.     

The Stock Market Crash Really Did Cause the Great Recession

This paper studies the connection between the stock market and the unemployment rate. I establish three facts. First, the log of the real value of the S&P 500 and the log of a logistic transformation of the unemployment rate are non‐stationary cointegrated series. Second, the stock market Granger causes the unemployment rate. Third, the connection between changes in the real value of the stock market and changes in the unemployment rate has remained structurally stable over seventy years. My results establish that the fall in the stock market in the autumn of 2008 provides a plausible causal explanation for the magnitude of the Great Recession.     

Great recession,slow recovery and muted fiscal policies in the US

This paper reconsiders the role of macroeconomic shocks and policies in determining the Great Recession and the subsequent recovery in the US. The Great Recession was mainly caused by a large demand shock and by the ZLB on the interest rate policy. In contrast with previous findings, the subsequent jobless recovery is explained by the ZLB effect. We estimate a fraction of Non-Ricardian households which is close to 50%, and obtain comparatively large fiscal multipliers. However we cannot detect a significant contribution of fiscal policies in stabilizing the US economy. For instance, the 2007–2009 large increase in expenditure-to-GDP ratios was apparently determined by the adverse non-policy shocks that caused the recession.     

Impact of the Great Recession on unemployed and NEET individuals’ labour market transitions in Ireland

The impact that the Great Recession has had on countries’ labour markets has been well documented. In Ireland, the contraction in economic activity that took place resulted in the country's overall unemployment rate increasing from 4.6% in 2006 to 15% in 2012. The country's youth unemployment rate rose from 9.9% to 33% over the same time period, while the proportion of NEETs increased from 10.1% in 2006 to 18.7% in 2012. Policymakers are aware of the unemployment rates of young and prime-aged people as well as the NEETs rate. However, little is known about these groups’ profiles, whether their profiles have changed since the recession and also their labour market transition patterns pre and post the Great Recession. Given the importance of this information in the design of effective activation measures to assist unemployed and NEET individuals, this paper examines each of these issues in turn. Overall, the study found for all three groups examined that the rate of transition to employment fell dramatically between 2006 and 2011. The analysis showed that the drop in the groups’ transition rates was not due to changes in the underlying sub-group population structures but to changes in the external environment that resulted in the impact of possessing certain characteristics changing over the recession. For example, education and nationality have become more important in finding a job in Ireland over the course of the recession, while there has been a fall in the scarring impact of unemployment durations.     

Euro area real-time density forecasting with financial or labor market frictions

We compare real-time density forecasts for the euro area using three DSGE models. The benchmark is the Smets and Wouters model, and its forecasts of real GDP growth and inflation are compared with those from two extensions. The first adds financial frictions and expands the observables to include a measure of the external finance premium. The second allows for the extensive labor-market margin and adds the unemployment rate to the observables. The main question that we address is whether these extensions improve the density forecasts of real GDP and inflation and their joint forecasts up to an eight-quarter horizon. We find that adding financial frictions leads to a deterioration in the forecasts, with the exception of longer-term inflation forecasts and the period around the Great Recession. The labor market extension improves the medium- to longer-term real GDP growth and shorter- to medium-term inflation forecasts weakly compared with the benchmark model.     

Measuring the natural rate of interest: A note on transitory shocks

We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the US economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.     

Vacancy posting, job separation and unemployment fluctuations

What is the relative importance of hiring and separation in driving unemployment fluctuations? This paper presents a framework to decompose the moments of unemployment and study the respective contributions of vacancy posting, a measure of firms’ hiring efforts, and separation. Separation accounts for about 40% of unemployment's variance, compared to 60% for vacancy posting, and contributes to about 60% of unemployment steepness asymmetry, the fact that unemployment increases faster than it decreases. Further, while vacancy posting is, on average, the most important contributor of unemployment fluctuations, the opposite is true around business cycle turning points, when separation is responsible for most of unemployment movements.     

The (un)importance of unemployment fluctuations for the welfare cost of business cycles

This paper studies the cost of business cycles within a real business cycle model with search and matching frictions in the labor market. We endogenously link both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk. The key result of the paper is that business cycles are costly: fluctuations over the cycle induce a higher average unemployment rate since employment is nonlinear in the job-finding rate and the past unemployment rate. We show this analytically for a special case of the model. We then calibrate the model to U.S. data. For the calibrated model, too, business cycles cause higher average unemployment; the welfare cost of business cycles can easily be an order of magnitude larger than Lucas's (1987) estimate. The cost of business cycles is the higher the lower the value of nonemployment is, or, equivalently, the lower is the disutility of work. The ensuing cost of business cycles rises further when workers' skills depreciate during unemployment.     

The joint impact of labour policies and the “Great Recession” on unemployment in Europe

The paper consists of an empirical analysis of the separate as well as joint impacts on total and youth unemployment of indicators of labour market policies on the one hand, and the financial crisis associated with the “Great Recession” on the other. In particular, we investigate labour market data in the past two decades for the Enlarged Europe and adopt a variable accounting for the idiosyncratic severity shock of the crisis. This time-varying and country-specific crisis variable enables us to test empirically and in a novel way the joint impact of labour market policies and the economic crisis on labour market dynamics even when accounting for common macro shocks.     

The geographic distribution of unemployment rates in the U.S.: A spatial-time series analysis

This paper presents estimates of the time series and spatial pattern of unemployment rate fluctuations in the U.S. over the period 1977.I–1983.IV. Spatial and time series autocorrelations over a regular lattice are estimated using both simultaneous (SAR) and conditional (CAR) autoregressive models of spatial series. The empirical results indicate that a temporary unemployment rate shock has a significant effect on unemployment rates in adjacent areas contemporaneously, but virtually no impact on neighboring unemployment rates after six quarters. A permanent change in an area's unemployment rate has a strong and persistent impact on unemployment rates in labor markets within 250 miles of the initial shock.     

United States

The US economy suffered its worst quarter since the Great Recession in Q1 with real GDP falling 2.9% on an annualized basis. The main downward revision to activity came from lower consumer spending on services with the previously estimated advance of 4.3% being revised down to only a 1.5% gain. Newly available data from the Census Bureau's quarterly services survey indicated a much smaller contribution to growth for the sector from 1.9 percentage points to 0.7 percentage points. Housing and business investment fared poorly while net trade imposed a sharp drag on growth…     

Labor market policy evaluation in equilibrium: Some lessons of the job search and matching model

We analyze the consequences of counseling provided to job seekers in a standard job search and matching model. It turns out that neglecting equilibrium effects induced by counseling can lead to wrong conclusions. In particular, counseling can increase steady state unemployment although counseled job seekers exit unemployment at a higher rate than the non-counseled. Dynamic analysis shows that permanent and transitory policies can have effects of opposite sign on unemployment.     

On the Time-Varying Effects of Economic Policy Uncertainty on the US Economy

We study the impact of Economic Policy Uncertainty (EPU) on the US Economy by using a VAR with time-varying coefficients. The coefficients are allowed to evolve gradually over time which allows us to discover structural changes without imposing them a priori. We find three different regimes, which match the three major periods of the US economy, namely the Great Inflation, the Great Moderation and the Great Recession. The initial impact on real GDP ranges between −0.2% for the Great Inflation and Great Recession and −0.15% for the Great Moderation. In addition, the adverse effects of EPU are more persistent during the Great Recession providing an explanation for the slow recovery. This regime dependence is unique for EPU as the macroeconomic consequences of Financial Uncertainty turn out to be rather time invariant.     

Mortgage default in an estimated model of the U.S. housing market

This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981–2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.     

Optimal unemployment policy in a matching equilibrium

This paper considers optimal unemployment policy in a matching equilibrium with risk averse workers and unobserved job search effort. The Planner chooses unemployment benefits, taxes and job creation subsidies to maximise a Utilitarian welfare function. Optimal policy involves a trade-off between higher employment taxes (which finance more generous unemployment benefits) and greater market tightness (which reduces the average unemployment spell). Optimal UI implies the initial UI payment equals the wage, thus ensuring consumption is smooth across the job destruction shock, and UI payments then fall with duration.