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Why We Should Use High Values for the Smoothing Parameter of the Hodrick-Prescott Filter

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  • Flaig Gebhard

    (University of Munich, Schackstraße 4, 80539 Munich, Germany)

Abstract

The HP filter is the most popular filter for extracting the unobserved trend and cycle components from a time series. Many researchers consider the smoothing parameter λ = 1600 as something like a universal constant. It is well known that the HP filter is an optimal filter under some restrictive assumptions, especially that the “cycle” is white noise. In this paper we show that we can get a good approximation of the optimal Wiener-Kolmogorov filter for autocorrelated cycle components by using the HP filter with a much higher smoothing parameter than commonly used. In addition, a new method - based on the properties of the differences of the estimated trend - is proposed for the selection of the smoothing parameter.

Suggested Citation

  • Flaig Gebhard, 2015. "Why We Should Use High Values for the Smoothing Parameter of the Hodrick-Prescott Filter," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 235(6), pages 518-538, December.
  • Handle: RePEc:jns:jbstat:v:235:y:2015:i:6:p:518-538
    DOI: 10.1515/jbnst-2015-0602
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    References listed on IDEAS

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    Cited by:

    1. Blöchl, Andreas, 2014. "Penalized Splines as Frequency Selective Filters - Reducing the Excess Variability at the Margins," Discussion Papers in Economics 20687, University of Munich, Department of Economics.
    2. Willi Leibfritz & Gebhard Flaig, 2013. "Economic Growth in Africa: Comparing Recent Improvements with the "lost 1980s and early 1990s" and Estimating New Growth Trends," CESifo Working Paper Series 4215, CESifo.
    3. Sebastian Letmathe, 2022. "Data-driven P-Splines under short-range dependence," Working Papers CIE 152, Paderborn University, CIE Center for International Economics.
    4. Crafts, Nicholas & Mills, Terence C., 2019. "The Pre-1914 UK Productivity Slowdown: A Reappraisal," CAGE Online Working Paper Series 437, Competitive Advantage in the Global Economy (CAGE).
    5. Nicholas Crafts & Terence C. Mills, 2017. "Six centuries of British economic growth: a time-series perspective," European Review of Economic History, Oxford University Press, vol. 21(2), pages 141-158.
    6. Leibfritz, Willi & Rottmann, Horst, 2013. "Fiscal policy during business cycles in developing countries: The case of Africa," Weidener Diskussionspapiere 36, University of Applied Sciences Amberg-Weiden (OTH).
    7. Yoon, Gawon, 2015. "Locating change-points in Hodrick–Prescott trends with an application to US real GDP: A generalized unobserved components model approach," Economic Modelling, Elsevier, vol. 45(C), pages 136-141.
    8. Bloechl, Andreas, 2014. "Reducing the Excess Variability of the Hodrick-Prescott Filter by Flexible Penalization," Discussion Papers in Economics 17940, University of Munich, Department of Economics.
    9. Bloechl, Andreas, 2014. "Penalized Splines, Mixed Models and the Wiener-Kolmogorov Filter," Discussion Papers in Economics 21406, University of Munich, Department of Economics.

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    More about this item

    Keywords

    Hodrick-Prescott filter; Wiener-Kolmogorov filter; smoothing parameter; trends; cycles;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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