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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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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;

References

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  1. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(3), pages 283-304.
  2. Skalin, Joakim & Teräsvirta, Timo, 1998. "Modelling asymmetries and moving equilibria in unemployment rates," Working Paper Series in Economics and Finance 262, Stockholm School of Economics, revised 05 Oct 1998.
  3. J. Michael Durland & Thomas H. McCurdy, 1993. "Duration Dependent Transitions in a Markov Model of U.S. GNP Growth," Working Papers, Queen's University, Department of Economics 887, Queen's University, Department of Economics.
  4. Nathan S. Balke & Thomas B. Fomby, 1991. "Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series," Research Paper, Federal Reserve Bank of Dallas 9101, Federal Reserve Bank of Dallas.
  5. Olivier J. Blanchard, 1986. "Hysteresis and Unemployment," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 430, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  7. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper, Federal Reserve Bank of New York 8907, Federal Reserve Bank of New York.
  8. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 127-157, January.
  9. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 305-333, December.
  10. 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, Elsevier, vol. 41(7), pages 1375-1401, July.
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