Unveiling Spanish unemployment persistence by output gap: a time-varying parameter approach

Aydın, Dilan
This paper investigates the persistence of Spanish unemployment by incorporating the output gap over the period of 1972-2015. Unlike to the existing literature which identifies labor market rigidity as the triggering factor of high unemployment, we utilize output gap extracted by Kalman filter in order to discriminate between impacts originated from (demand side) shocks and labor market institutions. Time-varying parameter approach allowing for both abrupt and smooth structural changes of parameters facilitates to explore the evolution of the persistence in the country whose history is full of crises and labor market reforms. The presence of lags between the implementation of the policy and its influence on the economy and the interactions between the shocks induce direction towards the gradual changes in Spain. Moreover, the model enables to scrutinize the natural rate or hysteresis hypothesis for each period without restricting the analysis into a dichotomous framework. Estimation results providing evidence in favor of hysteretic effects during the late 1970s and the early 1980s reveal a declining (rising) coefficient for lagged unemployment (output gap) in the subsequent years. Whereas abrupt changes of coefficients after 1984 and 1994 reforms coincided with the start of recovery phases, smooth transition of persistence coefficient after 2008 underlies different dynamics.
Citation Formats
D. Aydın, “Unveiling Spanish unemployment persistence by output gap: a time-varying parameter approach,” M.S. - Master of Science, Middle East Technical University, 2018.