You set out to forecast the unemployment rate in the UK (Uratecan), using the av

Question

You set out to forecast the unemployment rate in the UK (Uratecan), using the available quarterly data from the first quarter 1960 to the fourth quarter 1999.

A) The table below is the UKaggregate unemployment rate for the period 1999:Q1-2000:Q1 and levels (in %) of the current and lagged unemployment rates for 1999:Q1. Fill in the blanks for the missing unemployment rate and first lag levels.

B) You estimate an AR(1) in the change in the UK unemployment rate to forecast the aggregate unemployment rate. The result is below(HET-robust standard errors in parentheses):

What does the uratecan coefficient and R squared in the results suggest? Is the coeffeicent on uratecan sifnificant and at what level?

C) You want to see how sensitive your forecast is to changes in the specification. Given that you have estimated the regression with quarterly data, you consider an AR(4) model. This results in the following output (HET-robust standard errors in parentheses):

What is your forecast for the unemployment rate level in 2000:Q1? (You can round it to 2 decimal places.)

D) Given the various information criteria and the regression Rsquare below, is AR(1) or AR(4) model better to use for forecasting?

Quarter Canada Unemployment Rate 1999:Q1 4.3 1999:Q2 1999:Q3 1999:Q4 2000:Q1 First Lag Change in Unemployment Rate 0.1 0.0 0.1 -0.1 -0.1

Explanation / Answer

a)

b.)

c.

d) Looking at the MSE values for all three methods, the MSE is lower for 3-Month moving average compared to others which can be used to do forecast.

Quarter Unemployment rate 3 Month moving average forecast MSE-3 1974 1 5.4 1974 2 5.3 1974 3 5.3 5 0.00 1974 4 5.6 5 0.04 1975 1 6.9 6 0.93 1975 2 7.2 7 0.40 1975 3 7.2 7 0.01 1975 4 7 0.28

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