Many 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
588.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)