Detecting unemployment hysteresis: A simultaneous unobserved components model with Markov switching

We construct a new Markov-switching unobserved components framework for analysing hysteresis effects, featuring trend-cycle decomposition, identification of spillovers between the components and asymmetry over the business cycle. The decades-long upward trend in German unemployment is fully explaine...

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Bibliographic Details
Published in:Economics letters 2016-07, Vol.144, p.115-118
Main Authors: Klinger, Sabine, Weber, Enzo
Format: Article
Language:English
Subjects:
Business cycle
Business cycles
Hysteresis
Markov analysis
Markov switching
Reforms
Structural unemployment
Studies
Unobserved components
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Summary:We construct a new Markov-switching unobserved components framework for analysing hysteresis effects, featuring trend-cycle decomposition, identification of spillovers between the components and asymmetry over the business cycle. The decades-long upward trend in German unemployment is fully explained by hysteresis. The Great Recession was well absorbed because both hysteresis and structural unemployment were substantially reduced after institutional reforms. In contrast, U.S. unemployment was not driven by hysteresis effects. •Markov-switching unobserved components framework with asymmetric spillovers.•Upward trend in German unemployment fully explained by hysteresis.•Both hysteresis and structural unemployment reduced after institutional reforms.•U.S. unemployment not driven by hysteresis effects.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2016.04.027