Working Paper

A time-varying threshold STAR model of unemployment and the natural rate

Abstract: Smooth-transition autoregressive (STAR) models have proven to be worthy competitors of Markov-switching models of regime shifts, but the assumption of a time-invariant threshold level does not seem realistic and it holds back this class of models from reaching their potential usefulness. Indeed, an estimate of a time-varying threshold level of unemployment, for example, might serve as a meaningful estimate of the natural rate of unemployment. More precisely, within a STAR framework, one might call the time-varying threshold the ?tipping level? rate of unemployment, at which the mean and dynamics of the unemployment rate shift. In addition, once the threshold level is allowed to be time-varying, one can add an error-correction term?between the lagged level of unemployment and the lagged threshold level?to the autoregressive terms in the STAR model. In this way, the time-varying latent threshold level serves dual roles: as a demarcation between regimes and as part of an error-correction term.free rate puzzles, and the occurrence of trading break-downs.

Keywords: time series analysis; capital asset pricing model; Unemployment;

https://doi.org/10.20955/wp.2010.029

Status: Published in Oxford Open Economics

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2010

Number: 2010-029

Note: Publisher DOI: https://doi.org/10.1093/ooec/odac012

Related Works

• Working Paper Revision: A Time-Varying Threshold STAR Model with Applications