The Current Depth of Recession and Unemployment Rate Forecasts

Building upon Beaudry and Koop’s (1993) analysis, we consider a “current depth of the recession” (CDR) variable in modeling the time series behavior of the postwar quarterly U.S. unemployment rate. The CDR approach is consistent with the state-dependent behavior in the unemployment rate documented in the business cycle asymmetry literature. We show that while the CDR effect is significant in-sample, no statistically significant out-of-sample forecast improvement is obtained relative to the linear alternative. Augmenting an AR(2) model by inclusion of the CDR term, however, does not significantly worsen the out-of-sample forecast performance. We wish to thank an anonymous referee and Norm Swanson for helpful comments. * Corresponding author. Email: [email protected] ** Phone: 919-328-6151 Fax: 919-328-6743