A Note on Pre-2008 Unemployment-Rate Mean-Reversion: Wednesday Focus for October 8, 2014
Back before 2008, we neoclassical new Keynesian-new monetarist types were highly confident that the U.S. macroeconomy as then constituted had very powerful stabilizing forces built into it: if the unemployment rate rose above the so-called natural rate of unemployment, the NAIRU, it would within a very few years return to normal.
This is why we were confident:
1948-2014: Share of Deviation of Unemployment from Trend Erased After…
...1 Yr ...2 Yrs ...3 Yrs With NAIRU trend... 33.7% 67.4% 88.3% Cubic 32.4% 63.6% 84.1% Quadratic 31.8% 61.5% 80.5% Linear 27.8% 52.5% 69.2% No Trend
Standard errors? Bootstrapping the three-year forecast cubic-trend model with 10,000 replications produced a mean estimated coefficient of 84.3% with a standard error of the estimate of 17.4%-points–half again as large as the OLS estimated standard error.
We were wrong.
If you have R, and wish to play with the Rmarkdown files, take a look:
- RMarkdown File: https://www.dropbox.com/s/egv37ytaz4lyc2h/2014-09-29%20Unemployment%20Rate%20Mean%20Reversion.Rmd?dl=0
- Output File: https://www.dropbox.com/s/q11gbj64u2f31m9/2014-09-29_Unemployment_Rate_Mean_Reversion.html?dl=0
- RMarkdown File: https://www.dropbox.com/s/uffbtork0dre3ku/2014-09-29_Unemployment_Rate_Mean_Reversion_Simple_Bootstrap.Rmd?dl=0
- Output File: https://www.dropbox.com/s/ztw7kjve1ia98gt/2014-09-29_Unemployment_Rate_Mean_Reversion_Simple_Bootstrap.html?dl=0