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A Latent Variable Approach to Forecasting the Unemployment Rate

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Author Info
C. L. Chua () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
G. C. Lim () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
Sarantis Tsiaplias () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

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Abstract

A forecasting model for unemployment is constructed that exploits the time-series properties of unemployment while satisfying the economic relationships specified by Okun's law and the Phillips curve. In deriving the model, we jointly consider the problem of obtaining estimates of the unobserved potential rate of unemployment consistent with Okun's law and Phillips curve, and associating the potential rate of unemployment to actual unemployment. The empirical example shows that the model clearly outperforms alternative forecasting procedures typically used to forecast unemployment.

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Publisher Info
Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2009n19.

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Length: 27 pages
Date of creation: Jul 2009
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Handle: RePEc:iae:iaewps:wp2009n19

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Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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Related research
Keywords: Forecasting; Unemployment; Unobserved Components;

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation

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  7. Taylor, James W., 2008. "Exponentially weighted information criteria for selecting among forecasting models," International Journal of Forecasting, Elsevier, vol. 24(3), pages 513-524. [Downloadable!] (restricted)
  8. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia. [Downloadable!]
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  9. LeSage, James P, 1990. "A Comparison of the Forecasting Ability of ECM and VAR Models," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 664-71, November. [Downloadable!] (restricted)
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  11. Ord, J.K. & Koehler, A. & Snyder, R.D., 1995. "Estimation and Prediction for a Class of Dynamic Nonlinear Statistical Models," Monash Econometrics and Business Statistics Working Papers 4/95, Monash University, Department of Econometrics and Business Statistics.
  12. repec:fth:guelph:1991-4 is not listed on IDEAS
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