Detrending, stylized facts and the business cycle

Abstract

The stylized facts of macroeconomic time series can be presented by fitting structural time series models. Within this framework, we analyse the consequences of the widely used detrending technique popularised by Hodrick and Prescott (1980). It is shown that mechanical detrending based on the Hodrick–Prescott filter can lead investigators to report spurious cyclical behaviour, and this point is illustrated with empirical examples. Structural time‐series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components. Finally, the structural framework provides a basis for exposing the limitations of ARIMA methodology and models based on a deterministic trend with a single break.

The information content of M3 for future inflation in the Euro area

“…On the other hand, when the restriction that the inflation objective at the end of the sample equal 1.5 percent is imposed, little appears to be gained from estimating (3. lc) jointly with the rest of equations in the system. 14 The use of the HP filter to proxy the output gap is popular in applied work (see, for instance, Roberts (1997) in the context of the estimation of a Phillips curve model or Taylor (1999) in the context of monetary policy rules) although it is certainly not exempt from criticism (see, for instance, King and Rebelo (1993) or Harvey and Jaeger (1993)). As before, the estimates herein do not take into account the existence of potential measurement errors, nor do they take into account the two-sided nature of the filter, which may cause violations of weak and strong exogeneity assumptions.…”

R&D expenditure in G7 countries and the implications for endogenous fluctuations and growth

“…However, it is well known that the HP filter can create spurious cyclical structure and spurious correlations (Harvey and Jaeger, 1993) if the series is I(0). Given the limited reliability of unit-root tests (e.g.…”

Gender and the business cycle: An analysis of labour markets in the US and UK

“…Both the HP and Beveridge and Nelson (1981) approaches have been shown to place a specific set of restrictions on the data generating process within the more general structural time series, or unobserved components model (UCM) methodology of . As shown by Harvey and Jaeger (1993), for US GDP the HP filter with standard quarterly smoothing parameter can produce a very similar trend cycle decomposition to the less restricted UCM with stochastic trend and cycle. However, this is often not the case for other macroeconomic variables and the GDP of other countries.…”