Aggregate Demand or Reallocation Shocks : Identification Based on the Beveridge Curve and the Mattress Effect

In this paper, we use a structural VAR model to identify the main determinants of the forecasting error variance of unemployment, informality and vacancies in the metropolitan region of Rio de Janeiro. The model allows us to measure the relative importance of aggregate demand, employment realocation, and labor force participation shocks on these three variables. Identification is based on hypotheses reflecting the effects of the shocks on the Beveridge curve and the "mattress curve" (which relates unemployment to informality). The model points to the predominance of aggregate demand shocks in explaining unemployment movements in the medium and long run. Employment realocation shocks explain a significant portion of unemployment only in the short run