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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., John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  2. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 741-51, May.
  3. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  4. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9102, Université de Lausanne, Faculté des HEC, DEEP.
  5. Burnside, Craig, 1998. "Detrending and business cycle facts: A comment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(3), pages 513-532, May.
  6. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 782, C.E.P.R. Discussion Papers.
  7. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  8. Fatas, Antonio, 2000. "Endogenous growth and stochastic trends," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(1), pages 107-128, February.
  9. 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, Federal Reserve Bank of San Francisco 93-01, Federal Reserve Bank of San Francisco.
  10. 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.
  11. Gregory, Allan W. & Smith, Gregor W., 1996. "Measuring business cycles with business-cycle models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(6-7), pages 1007-1025.
  12. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 32(4), pages 1750-1783, December.
  13. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(3), pages 533-540, May.
  14. Jaeger, Albert, 1994. "Mechanical Detrending by Hodrick-Prescott Filtering: A Note," Empirical Economics, Springer, Springer, vol. 19(3), pages 493-500.
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