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On smoothing macroeconomic time series using HP and modified HP filter

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  • Choudhary, Ali
  • Hanif, Nadim
  • Iqbal, Javed

Abstract

In business cycle research, smoothing data is an essential step in that it can influence the extent to which model-generated moments stand up to their empirical counterparts. To demonstrate this idea, we compare the results of McDermott’s (1997) modified HP-filter with the conventional HP-filter on the properties of simulated and actual macroeconomic series. Our simulations suggest that the modified HP-filter proxies better the true cyclical series. This is true for temporally aggregated data as well. Furthermore, we find that although the autoregressive properties of the smoothed observed series are immune to smoothing procedures, the multivariate analysis is not. As a result, we recommend and hence provide series-, country- and frequency specific smoothing parameters.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45630.

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Date of creation: 28 Mar 2013
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Handle: RePEc:pra:mprapa:45630

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Keywords: Business Cycles; Cross Country Comparisons; Smoothing Parameter; Time Aggregation;

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  1. Alain GUAY & Pierre SAINT-AMANT, 2005. "Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles?," Annales d'Economie et de Statistique, ENSAE, issue 77, pages 133-155.
  2. 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.
  3. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  4. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(1), pages 25-60, August.
  5. Albert Marcet & Morten O. Ravn, 2001. "The HP-filter in cross-country comparisons," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 588, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
  6. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number burn46-1.
  7. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 17(1-2), pages 207-231.
  8. Pedersen, Torben Mark, 2001. "The Hodrick-Prescott filter, the Slutzky effect, and the distortionary effect of filters," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(8), pages 1081-1101, August.
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