Identifying the Cycle of a Macroeconomic Time-Series Using Fuzzy Filtering
This paper presents a new method for extracting the cycle from an economic time series. This method uses the fuzzy c-means clustering algorithm, drawn from the pattern recognition literature, to identify groups of observations. The time series is modeled over each of these sub-samples, and the results are combined using the “degrees of membership” for each data-point with each cluster. The result is a totally flexible model that readily captures complex non-linearities in the data. This type of “fuzzy regression” analysis has been shown by Giles and Draeseke (2003) to be highly effective in a broad range of situations with economic data. The fuzzy filter that we develop here is compared with the well-known Hodrick-Prescott (HP) filter in a Monte Carlo experiment, and the new filter is found to perform as well as, or better than, the HP filter. The advantage of the fuzzy filter is especially pronounced when the data have a deterministic, rather than stochastic, trend. Applications with real time-series illustrate the different conclusions that can emerge when the fuzzy regression filter and the HP filter are each applied to extract the cycle.
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