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Are Hodrick-Prescott `forecasts' rational?

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  • J. Z. Easaw

    (Department of Economics, University of Bath, Claverton Down, Bath, BA2 7AY, England)

  • S. M. Heravi

    (Cardiff Business School, University of Wales, Aberconway Building, Colum Drive, Cardiff, CF1 3EU.)

  • J. C. K. Ash

    (Department of Economics, University of Reading, PO Box 218, Whiteknights, Reading, Berks, RG6 6AA, England.)

  • D. J. Smyth

    (Economics Group, Middlesex University Business School, The Burroughs, Hendon, London NW4 4BT, England.)

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    Abstract

    We evaluate the usefulness of the Hodrick-Prescott (HP) filter as a proxy for rational expectations, using long runs of annual US inflation data. Our conclusion is that while the HP series are not fully rational in the sense of Muth (1961), they do generally meet the criterion of `weak rationality' recently proposed by Grant and Thomas (1999). They are also rational proxy predictors of direction for, following Merton (1981), agents would not change their prior in the opposite direction to these `forecasts'. However, smoother HP `forecasts' are more prone to inefficiency and less useful predictors of direction.

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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 27 (2002)
    Issue (Month): 4 ()
    Pages: 631-643

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    Handle: RePEc:spr:empeco:v:27:y:2002:i:4:p:631-643

    Note: Received: May 2000/Final Version Received: May 2001
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    Related research

    Keywords: Hodrick-Prescott filter; Rational expectations; Proxy forecasts; Inflation.;

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    Cited by:
    1. Kosei Fukuda, 2010. "Three new empirical perspectives on the Hodrick–Prescott parameter," Empirical Economics, Springer, vol. 39(3), pages 713-731, December.
    2. Benner, Joachim & Gern, Klaus-Jürgen & Kamps, Annette & Oskamp, Frank & Sander, Birgit & Scheide, Joachim & Schweickert, Rainer, 2005. "Geringere Dynamik der Weltkonjunktur," Open Access Publications from Kiel Institute for the World Economy 3490, Kiel Institute for the World Economy (IfW).
    3. Jeremy Couchman & Rukmani Gounder & Jen-Je Su, 2006. "Long memory properties of real interest rates for 16 countries," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(1), pages 25-30, January.
    4. Aliyu, Shehu Usman Rano, 2011. "Reactions of stock market to monetary policy shocks during the global financial crisis: the Nigerian case," MPRA Paper 35581, University Library of Munich, Germany, revised 28 Dec 2011.
    5. Marvasti, Akbar, 2013. "The role of price expectations and legal uncertainties in ocean mineral, exploration activities," Resources Policy, Elsevier, vol. 38(1), pages 68-74.

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