Reducing the Excess Variability of the Hodrick-Prescott Filter by Flexible Penalization
The Hodrick-Prescott filter is the probably most popular tool for trend estimation in economics. Compared to other frequently used methods like the Baxter-King filter it allows to estimate the trend for the most recent periods of a time series. However, the Hodrick- Prescott filter suffers from an increasing excess variability at the margins of the series inducing a too flexible trend function at the margins compared to the middle. This paper will tackle this problem using spectral analysis and a flexible penalization. It will show that the excess variability can be reduced immensely by a flexible penalization, while the gain function for the middle of the time series is used as a measure to determine the degree of the flexible penalization.
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- 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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- Danthine, Jean-Pierre & Girardin, Michel, 1989. "Business cycles in Switzerland : A comparative study," European Economic Review, Elsevier, vol. 33(1), pages 31-50, January.
- Gebhard Flaig, 2012. "Why We Should Use High Values for the Smoothing Parameter of the Hodrick-Prescott Filter," CESifo Working Paper Series 3816, CESifo Group Munich.
- Proietti, Tommaso, 2007. "Signal extraction and filtering by linear semiparametric methods," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 935-958, October.
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