The non‐linear dynamics of output and unemployment in the U.S.

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Abstract
This paper studies the joint dynamics of U.S. output and unemployment rate in a non‐linear VAR model. The non‐linearity is introduced through a feedback variable that endogenously augments the output lags of the VAR in recessionary phases. Sufficient conditions for the ergodicity of the model, potentially applying to a larger class of threshold models, are provided. The linear specification is rejected in favour of our threshold VAR. However, in the estimation the feedback is found to be statistically significant only on unemployment, while it transmits to output through its cross‐correlation. This feedback effect from recessions generates important asymmetries in the propagation of shocks, a possible key to interpret the divergence in the measures of persistence in the literature. The regime‐dependent persistence also explains the finding that the feedback from recession exerts a positive effect on the long‐run growth rate of the economy, an empirical validation of the Schumpeterian macroeconomic theories. Copyright © 2001 John Wiley & Sons, Ltd.