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A Latent Variable Approach to Forecasting the Unemployment Rate

Author

Listed:
  • 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)

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.

Suggested Citation

  • C. L. Chua & G. C. Lim & Sarantis Tsiaplias, 2009. "A Latent Variable Approach to Forecasting the Unemployment Rate," Melbourne Institute Working Paper Series wp2009n19, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2009n19
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    References listed on IDEAS

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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