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Economic Growth and Business Cycles: A Critical Comment on Detrending Time Series (Revised Version)

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  • Klaus Reiner Schenk-Hoppé

Abstract

In this paper we pursue an approach based on economic theory to illustrate possible shortcomings of widely-used detrending methods.We analyze a simple model of economic growth and business cycles in which investment and technical progress are stochastic.The Hodrick-Prescott and the Baxter-King filter are shown to detect spurious business cycles which are not related to actual cycles in the model.Our results cast doubts on the validity of commonly-accepted stylized business cycle facts. We also discuss the relation of business-cycle dating based on indicators of economic activity,as e.g.applied by the NBER,and the detrending results.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 054.

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Handle: RePEc:zur:iewwpx:054

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Keywords: detrending; business cycles; growth;

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  1. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  2. Danthine, J.P. & Donaldson, J.B., 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Papers fb-_91-11, Columbia - Graduate School of Business.
  3. Allan W. Gregory & Gregor W. Smith, 1994. "Measuring Business Cycles with Business-Cycle Models," Working Papers 901, Queen's University, Department of Economics.
  4. 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.
  5. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  6. Jaeger, Albert, 1994. "Mechanical Detrending by Hodrick-Prescott Filtering: A Note," Empirical Economics, Springer, vol. 19(3), pages 493-500.
  7. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  8. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, vol. 49(3), pages 741-51, May.
  9. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  10. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
  11. Fatas, Antonio, 2000. "Endogenous growth and stochastic trends," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 107-128, February.
  12. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  13. Burnside, Craig, 1998. "Detrending and business cycle facts: A comment," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 513-532, May.
  14. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
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