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The HP-Filter in Cross-Country Comparisons

  • Albert Marcet
  • Morten O. Ravn

Many empirical studies have applied the Hodrick-Prescott fllter in cross- country comparisons of business cycle fluctuations. The Hodrick-Prescott filter involves the smoothing parameter, , and standard practise in the literature is to set this parameter equal to 1600 (in quarterly data) for all countries. We show that this choice might distort the results when the cyclical component is highly serially correlated, and that care should be taken in checking if the results are "reasonable" in the light of common wisdom. For example, for Spanish data we show that, contrary to conventional wisdom, the results imply that the Spanish cycle is very smooth and that the period of 1975-1985 was one of macroeconomic tranquility. We propose to recast the HP-filter as a constrained minimization problem which selects endogenously a value of that imposes cross-country consistency of the imposed constraint. Our proposed method is easy to apply, retains all the virtues of the standard HP-filter. When applied to Spanish data the results imply a return to conventional wisdom and we found results in line with economic historian's views. We also examine data for a number of OECD countries and find that, with the exception of Spain, Italy and Japan, the standard choice of = 1600 is sensible.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 32.

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Date of creation: Sep 2015
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Handle: RePEc:bge:wpaper:32
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  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  2. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
  3. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. 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.
  5. 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.
  6. repec:fda:fdaddt:9706 is not listed on IDEAS
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