Forecasting Persistent Data with Possible Structural Breaks: Old School and New School Lessons Using OECD Unemployment Rates

Abstract In contrast to recent forecasting developments, 'Old School' forecasting techniques, such as exponential smoothing and the Box-Jenkins methodology, do not attempt to explicitly model or to estimate breaks in a time series. Adherents of the 'New School' methodology argue that once breaks are well-estimated, it is possible to control for regime shifts when forecasting. We compare the forecasts of monthly unemployment rates in 10 OECD countries using various Old School and New School methods. Although each method seems to have drawbacks and no one method dominates the others, the Old School methods often outperform the New School methods for forecasting the unemployment rates