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The HP-Filter in Cross-Country Comparisons

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  • Albert Marcet
  • Morten O. Ravn

Abstract

Many empirical studies have applied the Hodrick-Prescott fllter in cross- country comparisons of business cycle fluctuations. The Hodrick-Prescott filter involves the smoothing parameter, and standard practise in the literature is to set this parameter equal to 1600 (in quarterly data) for all countries. We show that this choice might distort the results when the cyclical component is highly serially correlated, and that care should be taken in checking if the results are "reasonable" in the light of common wisdom. For example, for Spanish data we show that, contrary to conventional wisdom, the results imply that the Spanish cycle is very smooth and that the period of 1975-1985 was one of macroeconomic tranquility. We propose to recast the HP-filter as a constrained minimization problem which selects endogenously a value of that imposes cross-country consistency of the imposed constraint. Our proposed method is easy to apply, retains all the virtues of the standard HP-filter. When applied to Spanish data the results imply a return to conventional wisdom and we found results in line with economic historian's views. We also examine data for a number of OECD countries and find that, with the exception of Spain, Italy and Japan, the standard choice of = 1600 is sensible.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 32.

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Date of creation: Dec 2003
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Handle: RePEc:bge:wpaper:32

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Keywords: Business cycles; cross-country comparisons; macroeconomic volatility;

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References

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  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  2. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
  3. AMBLER, Steve & CARDIA, Emanuela & ZIMMERMANN, Christian, 2000. "International Business Cycles: What Are the Facts?," Cahiers de recherche 2000-05, Universite de Montreal, Departement de sciences economiques.
  4. Luis A. Puch & Omar Licandro, 1997. "Are there any special features in the Spanish business cycle?," Investigaciones Economicas, Fundación SEPI, vol. 21(2), pages 361-394, May.
  5. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
  6. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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Citations

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Cited by:
  1. Jorge Enrique Restrepo & Claudio Soto, 2004. "Regularidades Empíricas de la Economía Chilena," Working Papers Central Bank of Chile 301, Central Bank of Chile.
  2. Fabio Busetti & Michele Caivano, 2013. "The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy," Temi di discussione (Economic working papers) 941, Bank of Italy, Economic Research and International Relations Area.
  3. Paul Cashin, 2004. "Caribbean Business Cycles," IMF Working Papers 04/136, International Monetary Fund.
  4. Rafael Doménech & Víctor Gómez, 2005. "Ciclo económico y desempleo estructural en la economía española," Investigaciones Economicas, Fundación SEPI, vol. 29(2), pages 259-288, May.
  5. Miroslav Plašil, 2011. "Potential Product, Output Gap and Uncertainty Rate Associated with Their Determination while Using the Hodrick-Prescott Filter," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 490-507.
  6. Meriem Djennas & Mohamed Benbouziane & Mustapha Djennas, 2012. "Labor Market Structure, Foreign Trade Competitiveness and Economic Growth in Eurozone," Book Chapters, Institute of Economic Sciences.
  7. Choudhary, Ali & Hanif, Nadim & Iqbal, Javed, 2013. "On smoothing macroeconomic time series using HP and modified HP filter," MPRA Paper 45630, University Library of Munich, Germany.
  8. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  9. Jorge Enrique Restrepo L. & Claudio Soto G., 2006. "Empirical Regularities Of The Chilean Economy: 1986-2005," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(2), pages 15-40, August.
  10. Valdivia, Daney & Yujra, Paola, 2009. "Identificación de ciclos económicos en Bolivia: 1970-2008
    [Identification of business cycles in Bolivia: 1970-2008]
    ," MPRA Paper 35884, University Library of Munich, Germany.
  11. Facundo Piguillem & Anderson L. Schneider, 2010. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," EIEF Working Papers Series 1002, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2009.
  12. Kosei Fukuda, 2010. "Three new empirical perspectives on the Hodrick–Prescott parameter," Empirical Economics, Springer, vol. 39(3), pages 713-731, December.
  13. Imbs, Jean, 2000. "Sectors and the OECD Business Cycle," CEPR Discussion Papers 2473, C.E.P.R. Discussion Papers.
  14. Leon, Jorge, 2012. "Managing the Uncertainty in the Hodrick Prescott Filter," MPRA Paper 44531, University Library of Munich, Germany, revised 2012.
  15. Angel J. Ubide & Kevin Ross, 2001. "Mind the Gap," IMF Working Papers 01/203, International Monetary Fund.
  16. Ngwa Edielle, T. H. Jackson, 2006. "Soutenabilité des finances publiques au Cameroun : Approche de Bohn (1998)
    [Testing Fiscal sustainability in Cameroon : Approach of Bohn (1998)]
    ," MPRA Paper 9738, University Library of Munich, Germany.
  17. Francisco Xavier Lores, 2001. "Cyclical Behaviour Of Consumption Of Non-Durable Goods: Spain Versus U.S.A," Economics Working Papers we014710, Universidad Carlos III, Departamento de Economía.
  18. repec:cml:incocp:1-02 is not listed on IDEAS

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