REGIME SWITCHING MODELLING OF UNEMPLOYMENT RATE IN EASTERN EUROPE

This paper investigates the unemployment rate dynamics in Poland, Hungary, Slovakia, Latvia, Lithuania, Estonia, Bulgaria, Romania and Ukraine during 2000 – 2017. To analyse the dynamics of unemployment rate we constructed econometric regression models with nonlinearities that arose due to discrete changes in modes. We developed Markov switching model that allowed capturing the regularities by modelling the asymmetry in the unemployment rate during contractionary and expansionary states of the labour market. We evaluated two regimes of unemployment behaviour that were associated with high and low unemployment levels and estimated the transition probabilities of regime change and average expected durations in each regime. The comparison of mean and volatility of different regimes and the one-step ahead predictions of the regime probabilities for different countries revealed the labour market specifics for each country and showed differences in the flexibility of their reactions to changing economic environment.