Expectation-Driven Cycles: Time-varying Effects
This paper provides new insights into expectation-driven cycles by estimating a structuralVAR with time-varying coefficients and stochastic volatility, as in Cogley and Sargent (2005)and Primiceri (2005). We use survey-based expectations of the unemployment rate to measureexpectations of future developments in economic activity. We find that the effect of expectationshocks on the realized unemployment rate have been particularly large during the most recentrecession. Unanticipated changes in expectations contributed to the gradual increase in thepersistence of the unemployment rate and to the decline in the correlation between the inflationand the unemployment rate over time. Our results are robust to the introduction of financialvariables in the model.
Year of publication: |
2015
|
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Authors: | A. D’Agostino ; Mendicino, Caterina |
Institutions: | Banco de Portugal |
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