FORECASTING THE SWEDISH UNEMPLOYMENT RATE VAR VS TRANSFER-FUNCTION MODELING

The Swedish unemployment rate is forecast using three time series meth ods: the ARIMA, transfer function and Vector Autoregressive (VAR) mode ls. Within this context, the choice of modelling strategy is discussed . It is found that the forecasting performance of VAR models is improv ed by explicitly taking account of cointegration between the variables in the model, despite the fact that unemployment is not cointegrated. However, the more parsimonious ARIMA and transfer function models hav e lower RMSE for all forecasting horizons. It is also found that the a dditional variables in the VAR models are important for predicting the turning points in the unemployment rate.