Forecasting Spanish unemployment with Google Trends and dimension reduction techniques

  1. Rodrigo Mulero
  2. Alfredo García-Hiernaux
Journal:
SERIEs : Journal of the Spanish Economic Association

ISSN: 1869-4195

Year of publication: 2021

Volume: 12

Issue: 3

Pages: 329-349

Type: Article

DOI: 10.1007/S13209-021-00231-X DIALNET GOOGLE SCHOLAR lock_openOpen access editor

More publications in: SERIEs : Journal of the Spanish Economic Association

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Abstract

This paper presents a method to improve the one-step-ahead forecasts of the Spanish unemployment monthly series. To do so, we use numerous potential explanatory variables extracted from searches in Google (Google Trends tool). Two different dimension reduction techniques are implemented (PCA and Forward Stepwise Selection) to decide how to combine the explanatory variables or which ones to use. The results of a recursive forecasting exercise reveal a statistically significant increase in predictive accuracy of 10–25%, depending on the dimension reduction method employed. A deep robustness analysis confirms these findings, as well as the relevance of using a large amount of Google queries together with a dimension reduction technique, when no prior information on which are the most informative queries is available.

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