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The HP-Filter in Cross-Country Comparisons

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  • Albert Marcet
  • Morte O. Ravn

Abstract

Many empirical studies have applied the Hodrick-Prescott filter in cross-country comparisons of business cycle fluctuations. The Hodrick-Prescott filter involves the smoothing parameter l, and standard practice 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 unreasonable 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 1975-85 was one of macroeconomic tranquility. We propose to recast the HP-filter as a constrained minimization problem, which selects endogenously a value of l that imposes cross-country consistency of the imposed constraint. Our proposed method is easy to apply and retains all the virtues of the standard HP-filter. When applied to Spanish data, the results imply a return to conventional wisdom and we find 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 l = 1600 is sensible.

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Paper provided by FEDEA in its series Studies on the Spanish Economy with number 100.

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Handle: RePEc:fda:fdaeee:100

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  1. 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.
  2. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
  3. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report, Federal Reserve Bank of Minneapolis 145, Federal Reserve Bank of Minneapolis.
  4. Ambler, Steve & Cardia, Emanuela & Zimmermann, Christian, 2004. "International business cycles: What are the facts?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 257-276, March.
  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(4), pages 745-75, August.
  6. Luis Puch & Omar Licandro, . "Are there any special features in the Spanish business cycles?," Working Papers 97-06, FEDEA.
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Cited by:
  1. Paul Cashin, 2004. "Caribbean Business Cycles," IMF Working Papers 04/136, International Monetary Fund.
  2. 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.
  3. Anderson L. Schneider & Facundo Piguillem, 2008. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," 2008 Meeting Papers 835, Society for Economic Dynamics.
  4. 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, Central Bank of Chile, vol. 9(2), pages 15-40, August.
  5. Leon, Jorge, 2012. "Managing the Uncertainty in the Hodrick Prescott Filter," MPRA Paper 44531, University Library of Munich, Germany, revised 2012.
  6. 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.
  7. Angel J. Ubide & Kevin Ross, 2001. "Mind the Gap," IMF Working Papers 01/203, International Monetary Fund.
  8. Meriem Djennas & Mohamed Benbouziane & Mustapha Djennas, 2012. "Labor Market Structure, Foreign Trade Competitiveness and Economic Growth in Eurozone," Book Chapters, Institute of Economic Sciences.
  9. Kosei Fukuda, 2010. "Three new empirical perspectives on the Hodrick–Prescott parameter," Empirical Economics, Springer, Springer, vol. 39(3), pages 713-731, December.
  10. 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.
  11. 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), Bank of Italy, Economic Research and International Relations Area 941, Bank of Italy, Economic Research and International Relations Area.
  12. Jorge Enrique Restrepo & Claudio Soto, 2004. "Regularidades Empíricas de la Economía Chilena," Working Papers Central Bank of Chile, Central Bank of Chile 301, Central Bank of Chile.
  13. Imbs, Jean, 2000. "Sectors and the OECD Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2473, C.E.P.R. Discussion Papers.
  14. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, Elsevier, vol. 30(12), pages 2071-2088, December.
  15. 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, University of Economics, Prague, vol. 2011(4), pages 490-507.
  16. Rafael Doménech & Víctor Gómez, 2005. "Ciclo económico y desempleo estructural en la economía española," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 29(2), pages 259-288, May.
  17. Manfred Esquivel Monge & Mario Alfredo Rojas Sánchez, 2008. "Estimación del producto potencial para Costa Rica: período 1991-2006," Investigación Conjunta - español, , , edition 1, volume 1, number 1-02 edited by Centro de Estudios Monetarios Latinoamericanos (CEMLA), December.
  18. 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.

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