Labor Market and Financial Shocks : A Time-Varying Analysis

Motivated by the events of the Great Recession, we estimate a time-varying structural VAR model with labor market variables to analyze the effects of a financial shock, focusing on the US. Our results point out that a tightening of financial conditions is highly detrimental for the labor market. Moreover, we show that financial shocks hit the labor market asymmetrically in the last three decades, an implication that a standard VAR cannot capture: while negative financial shocks have been responsible for decreases in employment, our model does not find significant contribution of financial shocks throughout expansion periods. The source of this asymmetry is the time-varying standard deviation of the identified shock, which is higher in period of financial distress; on the other hand, we find that the transmission mechanism is almost constant over time