The HP-filter in cross-country comparisons
AbstractMany empirical studies of business cycles have followed the practise of applying the Hodrick-Prescott filter for cross-country comparisons. The standard procedure is to set the weight \lambda, which determines the 'smoothness' of the trend equal to 1600. We show that if this value is used for against common wisdom about business cycles. As an example, we show that the long recession occurred inSpain between 1975 and 1985 goes unnotoced by the HP filter. We propose a method for adjusting \lambda by reinterpreting the HP-filter as the solution to a constrained minimization problem. We argue that the common practice of fixing \lambda across countries amounts to chankging the constraints on trend variability across countries. Our proposed method is easy to apply, retains all the virtues of the standard HP-filter and when applied to Spanish data the results are in the line with economic historian's view. Applying the method to a number of OECD countries we find that, with the exception of Spain, Italy and Japan, the standard choice of \lambda=1600 is sensible.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 588.
Date of creation: Nov 2001
Date of revision: Dec 2003
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Business cycles; cross-country comparisons; macroeconomic volatility;
Other versions of this item:
- Albert Marcet & Morte O. Ravn, . "The HP-Filter in Cross-Country Comparisons," Studies on the Spanish Economy 100, FEDEA.
- Albert Marcet & Morten O. Ravn, 2003. "The HP-Filter in Cross-Country Comparisons," Working Papers 32, Barcelona Graduate School of Economics.
- Marcet, Albert & Ravn, Morten O., 2004. "The HP-Filter in Cross-Country Comparisons," CEPR Discussion Papers 4244, C.E.P.R. Discussion Papers.
- 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
This paper has been announced in the following NEP Reports:
- NEP-DGE-2001-12-19 (Dynamic General Equilibrium)
- NEP-ECM-2001-12-19 (Econometrics)
- NEP-ETS-2001-12-19 (Econometric Time Series)
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