A Latent Variable Approach to Forecasting the Unemployment Rate

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

Melbourne Institute Working Paper Series from 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.

Keywords: Forecasting; Unemployment; Unobserved Components (search for similar items in EconPapers)
JEL-codes: C53 E27 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-lab
Date: 2009-07
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