COINTEGRATION AND VAR INNOVATION RESPONSE ANALYSIS OF UNEMPLOYMENT, EXCHANGE RATES, AND INTERNATIONAL TRADE
Open Access
Author:
Feng, Guanhao
Area of Honors:
Interdisciplinary in Economics and Statistics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
Herman J Bierens, Thesis Supervisor James R. Tybout, Thesis Honors Advisor Naomi S Altman, Thesis Honors Advisor
Keywords:
COINTEGRATION VAR INNOVATION RESPONSE ANALYSIS UNEMPLOYMENT EXCHANGE RATES INTERNATIONAL TRADE
Abstract:
The aim of this honors thesis is to examine whether and how fluctuations in exchange rates and international trade affect the unemployment rate in the United States. In particular, on the basis monthly data and cointegrated or regular vector autoregressive (VAR) models I study the response of unemployment to shocks in exchange rates and international trade from the three largest trade partners of the United States (China, Japan and the Euro zone). To distinguish these effects from domestic causes I also include the index of industrial production in these models. The empirical work is to examine whether the time series involved are stationarity or unit root processes, and to conduct cointegration and VAR innovation response analysis. The results show that there is no significant response of unemployment to innovation shocks in the exchange rates. The same applies to innovation shocks in trade, except for trade with Japan and Germany. In particular, the response of unemployment to a unit shock in import from Japan is negative, which is contrary to what one would expect, whereas in a multi-country model the response of unemployment to a unit shock in exports to Germany is positive.
