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The HP-filter in cross-country comparisons

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  • Albert Marcet
  • Morten O. Ravn

Abstract

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.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 588.

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Date of creation: Nov 2001
Date of revision: Dec 2003
Handle: RePEc:upf:upfgen:588

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Web page: http://www.econ.upf.edu/

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Keywords: Business cycles; cross-country comparisons; macroeconomic volatility;

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References

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  1. Luis Puch & Omar Licandro, . "Are there any special features in the Spanish business cycles?," Working Papers 97-06, FEDEA.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  3. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
  4. AMBLER, Steve & CARDIA, Emanuela & ZIMMERMANN, Christian, 2000. "International Business Cycles: What Are the Facts?," Cahiers de recherche 2000-05, Universite de Montreal, Departement de sciences economiques.
  5. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-88, September.
  6. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Angel J. Ubide & Kevin Ross, 2001. "Mind the Gap," IMF Working Papers 01/203, International Monetary Fund.
  2. 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, vol. 9(2), pages 15-40, August.
  3. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  4. repec:cml:incocp:1-02 is not listed on IDEAS
  5. Anderson L. Schneider & Facundo Piguillem, 2008. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," 2008 Meeting Papers 835, Society for Economic Dynamics.
  6. 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.
  7. Rafael Doménech & Víctor Gómez, 2005. "Ciclo económico y desempleo estructural en la economía española," Investigaciones Economicas, Fundación SEPI, vol. 29(2), pages 259-288, May.
  8. Paul Cashin, 2004. "Caribbean Business Cycles," IMF Working Papers 04/136, International Monetary Fund.
  9. Leon, Jorge, 2012. "Managing the Uncertainty in the Hodrick Prescott Filter," MPRA Paper 44531, University Library of Munich, Germany, revised 2012.
  10. 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.
  11. 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.
  12. Meriem Djennas & Mohamed Benbouziane & Mustapha Djennas, 2012. "Labor Market Structure, Foreign Trade Competitiveness and Economic Growth in Eurozone," Book Chapters, Institute of Economic Sciences.
  13. 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, vol. 2011(4), pages 490-507.
  14. Imbs, Jean, 2000. "Sectors and the OECD Business Cycle," CEPR Discussion Papers 2473, C.E.P.R. Discussion Papers.
  15. Jorge Enrique Restrepo & Claudio Soto, 2004. "Regularidades Empíricas de la Economía Chilena," Working Papers Central Bank of Chile 301, Central Bank of Chile.
  16. 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.
  17. Kosei Fukuda, 2010. "Three new empirical perspectives on the Hodrick–Prescott parameter," Empirical Economics, Springer, vol. 39(3), pages 713-731, December.
  18. 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) 941, Bank of Italy, Economic Research and International Relations Area.

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