A Time-Varying Threshold Star Model of Unemployment and the Natural Rate

Federal Reserve Bank of St. Louis Working Paper No. 2010-029A

28 Pages Posted: 21 Sep 2010 Last revised: 29 Sep 2010

See all articles by Michael Dueker

Michael Dueker

Russell Investments

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Martín Sola

Universidad Torcuato Di Tella; University of London - Economics, Mathematics and Statistics

Date Written: September 20, 2010

Abstract

Smooth-transition autoregressive (STAR) models have proven to be worthy competitors of Markov-switching models of regime shifts, but the assumption of a time-invariant threshold level does not seem realistic and it holds back this class of models from reaching their potential usefulness. Indeed, an estimate of a time-varying threshold level of unemployment, for example, might serve as a meaningful estimate of the natural rate of unemployment. More precisely, within a STAR framework, one might call the time-varying threshold the "tipping level" rate of unemployment, at which the mean and dynamics of the unemployment rate shift. In addition, once the threshold level is allowed to be time-varying, one can add an error correction term--between the lagged level of unemployment and the lagged threshold level--to the autoregressive terms in the STAR model. In this way, the time-varying latent threshold level serves dual roles: as a demarcation between regimes and as part of an error-correction term.

Keywords: Regime switching, smooth-transition autoregressive model, unemployment, non- linear models

JEL Classification: C22, E31, G12

Suggested Citation

Dueker, Michael and Owyang, Michael T. and Sola, Martín, A Time-Varying Threshold Star Model of Unemployment and the Natural Rate (September 20, 2010). Federal Reserve Bank of St. Louis Working Paper No. 2010-029A. Available at SSRN: https://ssrn.com/abstract=1679954 or http://dx.doi.org/10.2139/ssrn.1679954

Michael Dueker

Russell Investments ( email )

909 A Street
Tacoma, WA 98402
United States

HOME PAGE: http://sites.google.com/site/michaeldueker

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Martín Sola

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina
5411 4784 0080 (Phone)
5411 4784 9807 (Fax)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6411 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/sola/

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