Threshold nonlinearities in unemployment rates: further evidence for the UK and G3 economies

The paper appraises the in-sample and out-of-sample adequacy of linear AR a nd nonlinear SETAR models of unemployment rates for Germany, Japan, the UK and the US. Tests are reported for the presence and specification of thresh old nonlinearities, SETAR model estimates, limiting dynamic propel ties and residual diagnostics, and out-of-sample forecasting performance. In-sample , threshold non-linearities are confirmed to be strongly present for the UK , US and Germany, and more marginally so for Japan. Out-of-sample, exceptin g Japan, SETAR models provide superior onestep-ahead forecast on RMSE groun ds, most notably for the US. Final tests indicate that these models exhibit predictive accuracy in the sense of parameter and residual variance stabil ity, implying the potential for exploitation of such nonlinearity in offici al forecasting.