IDEAS home Printed from https://ideas.repec.org/p/sbp/wpaper/88.html
   My bibliography  Save this paper

Fully Modified HP Filter

Author

Listed:
  • Muhammad Nadim Hanif

    (State Bank of Pakistan)

  • Javed Iqbal

    (State Bank of Pakistan)

  • M. Ali Choudhary

    (State Bank of Pakistan)

Abstract

Business cycle estimation is core of macroeconomics research. Hodrick-Prescott (1997) filter, (or HP filter), is the most popular tool to extract cycle from a macroeconomic time series. There are certain issues with HP filter including fixed value of ? across the series/countries and end points bias (EPB). Modified HP filter (MHP) of McDermott (1997) attempted to address the first issue. Bloechl (2014) introduced a loss function minimization approach to address the EPB issue but keeping lambda fixed (as in HP filter). In this study we marry the endogenous lambda approach of McDermott (1997) with loss function minimization approach of Bloechl (2014) to analyze EPB in HP filter, while intuitively changing the weighting scheme used in the latter. We contribute by suggesting an endogenous weighting scheme along with endogenous smoothing parameter to resolve EPB issue of HP filter. We call this fully modified HP (FMHP) filter. Our FMHP filter outperforms a variety of conventional filters in a power comparison (simulation) study as well as in observed real data (univariate and multivariate) analytics for a large set of countries.

Suggested Citation

  • Muhammad Nadim Hanif & Javed Iqbal & M. Ali Choudhary, 2017. "Fully Modified HP Filter," SBP Working Paper Series 88, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:88
    as

    Download full text from publisher

    File URL: http://www.sbp.org.pk/publications/wpapers/2017/wp88.pdf
    File Function: First version, 2017
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mahraddika, Wishnu, 2020. "Real exchange rate misalignments in developing countries: The role of exchange rate flexibility and capital account openness," International Economics, Elsevier, vol. 163(C), pages 1-24.

    More about this item

    Keywords

    Business Cycle; Time Series; Fully Modified HP Filter; End Point Bias in HP Filter; Simulation; Cross Country Study.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sbp:wpaper:88. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Faisal Saleem (email available below). General contact details of provider: https://edirc.repec.org/data/sbpgvpk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.