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Censored latent effects autoregression, with an application to US unemployment

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  • Franses, Ph.H.B.F.
  • Paap, R.

Abstract

A new time series model is proposed to describe observed asymmetries in postwar unemployment data. We assume that recession periods, when unemployment increases rapidly, are caused by unobserved positive shocks. The generating mechanism of these latent shocks is a censored regression model, where linear combinations of lagged explanatory variables lead to positive shocks, while otherwise shocks are equal to zero. We apply our censored latent effects autoregression [CLEAR] to monthly US unemployment, where the positive shocks are found to depend on lagged oil prices, industrial production, the term structure of interest rates and a stock market index. The model fits the data well, and its out-of-sample forecasts appear to outperform those from alternative models.

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File URL: http://repub.eur.nl/pub/1532/feweco19981126102948.pdf
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Bibliographic Info

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 9841.

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Date of creation: 01 Jan 1998
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Handle: RePEc:ems:eureir:1532

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Keywords: Censored latent effects; censored regression model; unemployment data;

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  1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis in Unemployment," NBER Working Papers 2035, National Bureau of Economic Research, Inc.
  2. Skalin, Joakim & Ter svirta, Timo, 2002. "Modeling Asymmetries And Moving Equilibria In Unemployment Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 202-241, April.
  3. Zoega, Gylfi, 1994. "Unemployment Persistence: Does the Size of the Shock Matter?," CEPR Discussion Papers 1082, C.E.P.R. Discussion Papers.
  4. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  5. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  6. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
  7. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  8. Nathan S. Balke & Thomas B. Fomby, 1991. "Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series," Research Paper 9101, Federal Reserve Bank of Dallas.
  9. J. Michael Durland & Thomas H. McCurdy, 1993. "Duration Dependent Transitions in a Markov Model of U.S. GNP Growth," Working Papers 887, Queen's University, Department of Economics.
  10. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
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