Melbourne Institute Working Paper Series Database (1984 - 2010)

Melbourne Institute Working Paper No. 19/2009

A Latent Variable Approach to Forecasting the Unemployment Rate

by

Chew Lian Chua, G. C. Lim and Sarantis Tsiaplias

Date: July 2009

Abstract: A forecasting model for unemployment is constructed that exploits the time-series properties of unemployment while satisfying the economic relationships specified by Okuns 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 Okuns 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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