ECON 497A: Forecasting

Empirical homework assignment 9

The data for the homework assignment is available in EasyReg (former) default format (*) and in Excel CSV format (**). This data file contains the monthly time series "Unemployment rate", starting from month 1948.01

  1. Because the unemployment rate is bounded between 0 and 100%, transform it as Y = LOG[U/(100-U)], where U is the original unemployment rate, using the following steps:
    • Add the constant 1 to the data
    • Make the new variable 100-U, which is the linear combination of 1 and U, with coefficients 100 and -1, respectively.
    • Make the new variable U/(100-U), which is the multiplicative combination of U and 100-U, with powers 1 and -1, respectively.
    • Take the log of U/(100-U).
  2. To test whether Y = LOG[U/(100-U)] is a unit root process, apply Breitung's unit root test to the 12 months moving average of Y = LOG[U/(100-U)]. Which version of the Breitung test would you use, and why?
  3. Estimate an ARIMA model for Y = LOG[U/(100-U)], with seasonal dummy variables, and seasonal and non-seasonal AR and MA lag polynomials of order 2.
  4. Determine which coefficients can be set equal to zero, and re-estimate the model.
  5. The last month in the data set is 1995.09. To forecast the unemployment rate in month 1995.10, add a missing value to the data, via Menu > Input > Prepare time series for forecasting.
  6. Forecast Y = LOG[U/(100-U)] for month 1995.10.
  7. Calculate the corresponding forecast of U = Unemployment rate (You need a scientific calculator to compute the EXP function).

(*) Click on the link, and save the file as a text file on your hard disk via the "Save as .." option of your web browser. Note that Internet Explorer will try to save the file as a web page (*.htm format). You have to overrule that.

(**) If you use Internet Explorer and you click on the link the file will be automatically imported in Excel, provided that you have installed Excel. Then use the "Save as .." option of Excel to save the file on your hard disk. Netscape and Mozilla Firefox will display the file as a text file. Therefore, if you use Netscape or Firefox follow the procedure under (*).