Unemployment Variation Over the Business Cycles: A Comparison of Forecasting Models

Journal of Forecasting, Forthcoming

31 Pages Posted: 29 Feb 2004 Last revised: 4 Oct 2013

See all articles by Saeed Moshiri

Saeed Moshiri

Saint Thomas More College University of Saskatcehwan

Laura K. Brown

University of Manitoba - Department of Economics

Date Written: August 2004

Abstract

Asymmetry has been well documented in the business cycle literature. The asymmetric business cycle suggests that major macroeconomic series, such as a country's unemployment rate, are non-linear and, therefore, the use of linear models to explain their behavior and forecast their future values may not be appropriate. Many researchers have focused on providing evidence for the non-linearity in the unemployment series. Only recently have there been some developments in applying non-linear models to estimate and forecast unemployment rates. A major concern of non-linear modeling is the model specification problem; it is very hard to test all possible non-linear specifications, and to select the most appropriate specification for a particular model.

Artificial Neural Network (ANN) models provide a solution to the difficulty of forecasting unemployment over the asymmetric business cycle. ANN models are non-linear, do not rely upon the classical regression assumptions, are capable of learning the structure of all kinds of patterns in a data set with a specified degree of accuracy and can then use this structure to forecast future values of the data. In this paper, we apply two ANN models, a back-propagation model and a generalized regression neural network model to estimate and forecast postwar aggregate unemployment rates in the US, Canada, UK, France, and Japan. We compare the out-of-sample forecast results obtained by the ANN models with those obtained by several linear and non-linear times series models currently used in the literature. It is shown that the artificial neural network models are able to forecast the unemployment series as well as, and in some cases, better than, the other univariate econometrics time series models in our test.

Keywords: Asymmetric Unemployment Rates, Non-linear Time Series Models, Backpropagation, Generalized Regression Neural Network

JEL Classification: C22, C45, C53, E37

Suggested Citation

Moshiri, Saeed and Brown, Laura K., Unemployment Variation Over the Business Cycles: A Comparison of Forecasting Models (August 2004). Journal of Forecasting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=510762

Saeed Moshiri (Contact Author)

Saint Thomas More College University of Saskatcehwan ( email )

1437 College Dr
Saskatoon, Saskatchewan S7N 0W6
Canada

Laura K. Brown

University of Manitoba - Department of Economics ( email )

501 Fletcher Argue Bldg.
Winnipeg, Manitoba R3T 5V5
Canada
204-474-9393 (Phone)
204-261-0090 (Fax)

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