The expected time to cross a threshold and its determinants: a simple and flexible framework

Gabriel Zsurkis, João Nicolau, Paulo M.M. Rodrigues

Research output: Contribution to journalArticle

Abstract

In this paper we introduce a flexible framework to estimate the expected time (ET) an outcome variable takes to cross a threshold conditional on covariates. The proposed methodology makes use of the Markovian property and allows us to infer the impacts that covariates have on the ET an outcome variable takes to revert to a value of interest (for instance, its mean) given a specific starting point. An empirical analysis of the response of U.S. unemployment persistence to monetary policy and government spending shocks is provided, contributing to a still limited literature which simultaneously allows for both types of shocks. Our results suggest that unexpected monetary and fiscal expansions seem to have a relevant role in accelerating the pace of unemployment decline towards its natural rate; and that contractionary monetary and fiscal shocks in a context of labor market slack may result in high ETs.

Original languageEnglish
Article number104047
JournalJournal of Economic Dynamics and Control
Volume122
DOIs
Publication statusPublished - Jan 2021

Keywords

  • Expected time
  • Fiscal shocks
  • Markov chains
  • Monetary shocks
  • Natural rate of unemployment
  • Nonlinearity
  • Unemployment gap

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