Business cycles, trend elimination, and the HP filter

Business cycles, trend elimination, and the HP filter

Trend elimination and business cycle estimation are analyzed by finite sample and asymptotic methods. An overview history is provided, operator theory is developed, limit theory as the sample size n → ∞ is derived, and filtered series properties are studied relative to smoothing parameter (λ) behavi...

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Bibliographic Details
Main Authors: PHILLIPS, Peter C. B., JIN, Sainan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2021
Subjects:
Detrending
Graduation
Hodrick Prescott filter
Integrated process
Limit theory
Smoothing
Trend break
Whittaker filter
Econometrics
Online Access:https://ink.library.smu.edu.sg/soe_research/2423
https://ink.library.smu.edu.sg/context/soe_research/article/3422/viewcontent/BusinessCycles_HPfilter_av.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:Trend elimination and business cycle estimation are analyzed by finite sample and asymptotic methods. An overview history is provided, operator theory is developed, limit theory as the sample size n → ∞ is derived, and filtered series properties are studied relative to smoothing parameter (λ) behavior. Simulations reveal that limit theory with λ =O(n4) delivers excellent approximations to the HP filter for common sample sizes but fails to remove stochastic trends, contrary to standard thinking in macroeconomics and thereby explaining ‘spurious cycle’ effects of the HP filter. The findings are related to the long run effects of the GFC.

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