Why you should never use the Hodrick-Prescott Filter: Comment

Alban Moura

No 162, BCL working papers from Central Bank of Luxembourg

Abstract: Hamilton (2018) argues that one should never use the Hodrick-Prescott (HP) filter, given its drawbacks and the existence of a better alternative. This comment shows that the main drawback Hamilton finds in the HP filter, the presence of filter-induced dynamics in the estimate of the cyclical component, is also a key feature of the alternative filter proposed by Hamilton. As with the HP filter, the Hamilton filter applied to a random walk extracts a cyclical component that is highly predictable, that can predict other variables, and whose properties reflect as much the filter as the underlying data-generating process. In addition, the Hamilton trend lags the data by construction and there is some arbitrariness in the choice of a key parameter defining the filter. Therefore, a more balanced assessment is that the HP and Hamilton filters provide different ways to look at the data, with neither being clearly superior from a practical perspective.

Keywords: HP filter; Hamilton filter; business cycles; detrending; filtering. (search for similar items in EconPapers)
JEL-codes: B41 C22 E32 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2022-08
New Economics Papers: this item is included in nep-ecm and nep-ets
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https://www.bcl.lu/en/publications/Working-papers/162/BCLWP162.pdf (application/pdf)

Related works:
Journal Article: Why You Should Never Use the Hodrick-Prescott Filter. A Comment on Hamilton (The Review of Economics and Statistics, 2018) (2024)
Working Paper: Why you should never use the Hodrick-Prescott filter: comment (2022)
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