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On the Usefulness of Constant Gain Least Squares when Forecasting the Unemployment Rate

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  • Jan-Erik Antipin
  • Farid Jimmy Boumediene
  • Pär Österholm

Abstract

In this paper, we assess the usefulness of constant gain least squares (CGLS) when forecasting the unemployment rate. Using quarterly data from 1970 to 2009, we conduct an out-of-sample forecast exercise in which univariate autoregressive models for the unemployment rate in Australia, Sweden, the United Kingdom and the United States are employed. Results show that CGLS very rarely outperforms OLS. At horizons of six to eight quarters, OLS is always associated with higher forecast precision, regardless of model size or gain employed for Australia, Sweden and the United States. Our findings suggest that while CGLS has been shown valuable when forecasting certain macroeconomic time series, it has shortcomings when forecasting the unemployment rate. One problematic feature is found to be an increased tendency for the autoregressive model to have explosive dynamics when estimated with CGLS.

Suggested Citation

  • Jan-Erik Antipin & Farid Jimmy Boumediene & Pär Österholm, 2014. "On the Usefulness of Constant Gain Least Squares when Forecasting the Unemployment Rate," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 60(4), pages 315-336.
    • Handle: RePEc:dah:aeqaeq:v60_y2014_i4_q4_p315-336
    DOI: 10.3790/aeq.60.4.315
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    Keywords

    Unemployment Rate; CGLS;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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