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Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles?

  • Alain GUAY
  • Pierre SAINT-AMANT

The authors assess the ability of the Hodrick-Prescott filter (HP) and the band-pass filter proposed by Baxter and King (BK) to extract the business-cycle component of macroeconomic time series by using two different definitions of the business-cycle component. First, they define that component to be fluctuations lasting no fewer than 6 and no more than 32 quarters; this is the definition of business-cycle frequencies used by Baxter and King. Second, they define the business-cycle component on the basis of a decomposition of the series into permanent and transitory components. The conclusions are the same in both cases. The filters perform adequately when the spectrum of the original series has a peak at business-cycle frequencies. When the spectrum is dominated by low frequencies, the filters provide a distorted business cycle. These findings suggest that the use of the HP and BK filters with series having the typical Granger shape is highly problematic.

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File URL: http://www.jstor.org/stable/20079119
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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2005)
Issue (Month): 77 ()
Pages: 133-155

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Handle: RePEc:adr:anecst:y:2005:i:77:p:09
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  18. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
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