Oil-price uncertainty and the U.K. unemployment rate: A forecasting experiment with random forests using 150 years of data

Rangan Gupta, Christian Pierdzioch and Afees Salisu

Resources Policy, 2022, vol. 77, issue C

Abstract: We analyze the predictive role of oil-price uncertainty for changes in the UK unemployment rate using more than a century of monthly data covering the period from 1859 (when the drilling of the first oil well started at Titusville, Pennsylvania, United States) to 2020. To this end, we use a machine-learning technique known as random forests. Random forests render it possible to model the potentially nonlinear link between oil-price uncertainty and subsequent changes in the unemployment rate in an entirely data-driven way, where it is possible to control for the impact of several other macroeconomic variables and other macroeconomic and financial uncertainties. We estimate random forests on rolling-estimation windows and find evidence that oil-price uncertainty predicts out-of-sample changes in the unemployment rate, especially at longer (six and twelve months) forecast horizons. Moreover, the relative importance of oil-price uncertainty has undergone substantial swings during the history of the modern petroleum industry. Relative importance was high in the 1970s and the 1980s, and it was higher than the relative importance of changes in the oil price itself for most of the sample period. We also find that oil-price uncertainty has predictive value for changes in the unemployment rate when we use a Lasso estimator, where random forests have a superior forecasting performance relative to the Lasso forecasts.

Keywords: Machine learning; Random forests; Oil uncertainty; Macroeconomic and financial uncertainties; Unemployment rate; Forecasting; United Kingdom (search for similar items in EconPapers)
JEL-codes: C22 C53 E24 E43 F31 G10 Q02 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: Oil-Price Uncertainty and the U.K. Unemployment Rate: A Forecasting Experiment with Random Forests Using 150 Years of Data (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:77:y:2022:i:c:s0301420722001106

DOI: 10.1016/j.resourpol.2022.102662

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