Labor Market and Financial Shocks: A Time-Varying Analysis

46 Pages Posted: 25 Jul 2017

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2017

Abstract

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.

Keywords: VAR, Labor Market Conditions, Financial Markets

JEL Classification: C32, E24, E44

Suggested Citation

Corsello, Francesco and Nispi Landi, Valerio, Labor Market and Financial Shocks: A Time-Varying Analysis (July 21, 2017). Available at SSRN: https://ssrn.com/abstract=3006609 or http://dx.doi.org/10.2139/ssrn.3006609

Francesco Corsello (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Valerio Nispi Landi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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