Mr. Bas B. Bakker, Marta Korczak, and Mr. Krzysztof Krogulski
In the last decade, over half of the EU countries in the euro area or with currencies
pegged to the euro were hit by large risk premium shocks. Previous papers have
focused on the impact of these shocks on demand. This paper, by contrast, focuses on
the impact on supply. We show that risk premium shocks reduce the output level that
maximizes profit. They also lead to unemployment surges, as firms are forced to cut
costs when financing becomes expensive or is no longer available. As a result, all
countries with risk premium shocks saw unemployment surge, even as euro area core
countries managed to contain unemployment as firms hoarded labor during the
downturn. Most striking, wage bills in euro area crisis countries and the Baltics
declined even faster than GDP, whereas in core euro area countries wage shares
Laurence M. Ball, João Tovar Jalles, and Mr. Prakash Loungani
This paper provides an assessment of the consistency of unemployment and output forecasts. We show that, consistent with Okun’s Law, forecasts of real GDP growth and the change in unemployment are negatively correlated. The Okun coefficient—the responsiveness of unemployment to growth—from forecasts is fairly similar to that in the data for various countries. Furthermore, revisions to unemployment forecasts are negatively correlated with revisions to real GDP forecasts. These results are based on forecasts taken from Consensus Economics for nine advanced countries since 1989.
This paper quantifies the economic impact of uncertainty shocks in the UK using data that span the recent Great Recession. We find that uncertainty shocks have a significant impact on economic activity in the UK, depressing industrial production and GDP. The peak impact is felt fairly quickly at around 6-12 months after the shock, and becomes statistically negligible after 18 months. Interestingly, the impact of uncertainty shocks on industrial production in the UK is strikingly similar to that of the US both in terms of the shape and magnitude of the response. However, unemployment in the UK is less affected by uncertainty shocks. Finally, we find that uncertainty shocks can account for about a quarter of the decline in industrial production during the Great Recession.