The HP-Filter in Cross-Country Comparisons
AbstractMany 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 InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 32.
Date of creation: Dec 2003
Date of revision:
Business cycles; cross-country comparisons; macroeconomic volatility;
Other versions of this item:
- Albert Marcet & Morten O. Ravn, 2001. "The HP-filter in cross-country comparisons," Economics Working Papers 588, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
- Marcet, Albert & Ravn, Morten O., 2004. "The HP-Filter in Cross-Country Comparisons," CEPR Discussion Papers 4244, C.E.P.R. Discussion Papers.
- Albert Marcet & Morte O. Ravn, . "The HP-Filter in Cross-Country Comparisons," Studies on the Spanish Economy 100, FEDEA.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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