Template-Type: ReDIF-Paper 1.0
Author-Name: Jing Lian Suah
Author-X-Name-First: Jing Lian
Author-X-Name-Last: Suah
Title: The "plucking" model of the unemployment rate floor: Corss-country estimates and empirics
Abstract: The unemployment rates (u-rates) of 19 economies (10 advanced and 9 emerging) demonstrate properties consistent with the plucking model. That the amplitude of expansions and subsequent contractions are unrelated, but that the deeper the contraction, the greater the subsequent expansion. The plucking model, which suggests that the u-rate hovers at or above a theoretical floor, has implications for the unemployment-inflation trade-off as well as shock propagation mechanisms, including the effects of policy shocks. This paper does three things. First, building on existing empirics, it demonstrates a straightforward way to estimate the u-rate floor based on identified peaks in the business cycle and interpolation methods. Second, it analyses the empirical relationship between the u-rate and core inflation, and the effect of a binding u-rate floor on this. Third, it analyses the threshold effects of the u-rate gap on the propagation of macroeconomic shocks, with special attention given to interest rates, using a threshold panel local projections model. The paper finds that: (i) the u-rate hovers at or above the floor and converges towards the floor after each downturn; (ii) the relationship between core inflation and the u-rate weakens when the u-rate is further from the floor; and (iii) the propagation of interest rate, price and output shocks display threshold effects, while exchange rate and debt shocks do not.
Creation-Date: 2024-01
File-URL: https://www.bis.org/publ/work1159.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1159.htm
File-Format: text/html
Number: 1159
Keywords: plucking model, unemployment rate, nonlinear Phillips curve, threshold effects
Classification-JEL: E24, E31, E32, E52
Handle: RePEc:bis:biswps:1159