Unemployment and Inflation Regimes
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Anders Warne
In this paper we study 2-state Markov switching VAR models of monthly unemployment and inflation for three countries: Sweden, United Kingdom, and the United States. The primary purpose is to examine if periods of low inflation are associated with high or low unemployment volatility. To interpret the regimes the empirical results are compared with the predictions from a version of Rogoff's (1985) model of monetary policy. Our version is consistent with equilibrium unemployment and has the realistic feature of allowing both variables to be persistent. We find that both the theoretical and the empirical results suggest that an increase in central bank "conservativeness" can be associated with either a higher or a lower variance in unemployment. In the U.S. case we find that the variance of unemployment is lower in the low inflation regime than in the high inflation regime, while the Swedish and the U.K. cases suggest that unemployment variability is higher in the low inflation regime.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
- Article
- Instrumental-Variables Estimation in Markov Switching Models with Endogenous Explanatory Variables: An Application to the Term Structure of Interest Rates
- Unemployment and Inflation Regimes
- Output and Inflation Responses to Credit Shocks: Are There Threshold Effects in the Euro Area?
- Estimation of Value-at-Risk and Expected Shortfall based on Nonlinear Models of Return Dynamics and Extreme Value Theory
- On the Power of Absolute Convergence Tests
- Replication
- Corrigendum to "Are Real Exchange Rates Nonlinear or Non-Stationary? Evidence from a New Threshold Unit Root Test"
Articles in the same Issue
- Article
- Instrumental-Variables Estimation in Markov Switching Models with Endogenous Explanatory Variables: An Application to the Term Structure of Interest Rates
- Unemployment and Inflation Regimes
- Output and Inflation Responses to Credit Shocks: Are There Threshold Effects in the Euro Area?
- Estimation of Value-at-Risk and Expected Shortfall based on Nonlinear Models of Return Dynamics and Extreme Value Theory
- On the Power of Absolute Convergence Tests
- Replication
- Corrigendum to "Are Real Exchange Rates Nonlinear or Non-Stationary? Evidence from a New Threshold Unit Root Test"
