Google's MIDAS Touch: Predicting UK Unemployment with Internet Search Data

Abstract

Internet search data could be a useful source of information for policymakers when formulating decisions based on their understanding of the current economic environment. This paper builds on earlier literature via a structured value assessment of the data provided by Google Trends. This is done through two empirical exercises related to the forecasting of changes in UK unemployment. Firstly, economic intuition provides the basis for search term selection, with a resulting Google indicator tested alongside survey‐based variables in a traditional forecasting environment. Secondly, this environment is expanded into a pseudo‐time nowcasting framework which provides the backdrop for assessing the timing advantage that Google data have over surveys. The framework is underpinned by a MIDAS regression which allows, for the first time, the easy incorporation of Internet search data at its true sampling rate into a nowcast model for predicting unemployment. Copyright © 2016 John Wiley & Sons, Ltd.

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