Economic Growth and Business Cycles: A Critical Comment on Detrending Time Series (Revised Version)
In this paper we pursue an approach based on economic theory to illustrate possible shortcomings of widely-used detrending methods.We analyze a simple model of economic growth and business cycles in which investment and technical progress are stochastic.The Hodrick-Prescott and the Baxter-King filter are shown to detect spurious business cycles which are not related to actual cycles in the model.Our results cast doubts on the validity of commonly-accepted stylized business cycle facts. We also discuss the relation of business-cycle dating based on indicators of economic activity,as e.g.applied by the NBER,and the detrending results.
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