The Performance of Unemployment Rate Predictions in Romania. Strategies to Improve the Forecasts Accuracy

Issue: 4/2013

Mihaela Simionescu

Institute for Economic Forecasting, Romanian Academy, Bucharest, Romania,

The evaluation and improvement of forecasts accuracy generate growth in the quality of decisional process. In Romania, the most accurate predictions for the unemployment rate on the forecasting horizon 2001-2012 were provided by the Institute for Economic Forecasting (IEF) that is followed by European Commission and National Commission for Prognosis (NCP). The result is based on U1, but if more indicators are taken into consideration at the same time using the multi-criteria ranking, the conclusion remains the same. A suitable strategy for improving the degree of accuracy for these forecasts is represented by the combined forecasts. The accuracy of NCP predictions can be improved on the horizon 2001-2012, if the initial values are smoothed using Holt-Winters technique and Hodrick-Prescott filter. The use of Monte Carlo method to simulate the forecasted unemployment rate proved to be the best way to improve the predictions accuracy. Starting from an AR(1) model for the interest variable, the uncertainty analysis was included, the simulations being made for the parameters. Actually, the means of the forecasts distributions for unemployment are considered as point predictions which outperform the expectations of the three institutions. The strategy based on Monte Carlo method is an original contribution of the author introduced in this article regarding the empirical strategies of getting better predictions.

DOI: 10.2478/revecp-2013-0007
JEL: E27, E21, C53, C51
Keywords: multi-criteria ranking, Monte Carlo simulations, Holt-Winters smoothing exponential technique, Hodrick-Prescott filter, forecasts accuracy, forecasts, combined forecasts

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