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A Complete Model-Based Interpretation of the Hodrick-Prescott Filter: Spuriousness Reconsidered

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Author Info
Regina Kaiser () (Universidad Carlos III de Madrid)
Agustín Maravall () (Banco de España)
Abstract

The Hodrick-Prescott filter applied to seasonally adjusted series has become a paradigm for business-cycle estimation at many economic agencies and institutions. We show that the filter can be obtained from MMSE estimation of the components in an unobserved component model, where the original series is decomposed into (long-term) trend, cyclical, seasonal, and (highlytransitory) irregular components. The component models are sensible and combine desirable “ad-hoc” features with series-dependent features that guarantee consistency with the data. The model-based framework provides improvements having to do with the precision of end-point estimation and the stability of the cyclical signal.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/02/Fic/dt0208e.pdf
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File Function: First version, March 2002
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0208.

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Length: 31 pages
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:bde:wpaper:0208

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Related research
Keywords: Business-cycle estimation; Stochastic cycles and trends; Unobserved Component Models; ARIMA models;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the Business Cycle: a Modified Hodrick-Prescott Filter," Banco de España Working Papers 9912, Banco de España.
  2. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD, Economics Department. [Downloadable!]
  3. Pierce, David A., 1980. "Data revisions with moving average seasonal adjustment procedures," Journal of Econometrics, Elsevier, vol. 14(1), pages 95-114, September. [Downloadable!] (restricted)
  4. David A. Pierce, 1978. "Seasonal adjustment when both deterministic and stochastic seasonality are present," Special Studies Papers 107, Board of Governors of the Federal Reserve System (U.S.).
  5. Víctor Gómez & Pilar Bengoechea, 2000. "The quarterly national accounts trend-cycle filter versus model-based filters," Spanish Economic Review, Springer, vol. 2(1), pages 29-48. [Downloadable!] (restricted)
  6. Gomez, Victor, 1999. "Three Equivalent Methods for Filtering Finite Nonstationary Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 109-16, January.
  7. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278. [Downloadable!] (restricted)
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  8. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January. [Downloadable!] (restricted)
  9. Maravall, Agustin, 1985. "On Structural Time Series Models and the Characterization of Components," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 350-55, October.
  10. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept. [Downloadable!] (restricted)
  11. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the Business Cycle: a Modified Hodrick-Prescott Filter," Banco de España Working Papers 9912, Banco de España.
  12. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231. [Downloadable!] (restricted)
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  13. Gomez, Victor, 2001. "The Use of Butterworth Filters for Trend and Cycle Estimation in Economic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 365-73, July.
  14. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the business cycle: A modified Hodrick-Prescott filter," Spanish Economic Review, Springer, vol. 1(2), pages 175-206. [Downloadable!] (restricted)
  15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  16. David A. Pierce, 1978. "Seasonal Adjustment When Both Deterministic and Stochastic Seasonality Are Present," NBER Chapters, in: Seasonal Analysis of Economic Time Series, pages 242-280 National Bureau of Economic Research, Inc. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Artis & Toshihiro Okubo, 2008. "The Intranational Business Cycle: Evidence from Japan," Discussion Paper Series 221, Research Institute for Economics & Business Administration, Kobe University. [Downloadable!]
    Other versions:
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