The Hodrick-Prescott Filter, the Slutzky Effect, and the Distortionary Effect of Filters

Torben Mark Pedersen
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Torben Mark Pedersen: University of Copenhagen Institute of Economics

No 98-09, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The main contribution of this paper is the construction of a metric based on optimal filtering for measuring the distortionary effect of filters. The Hodrick-Prescott filter (HP-filter) has been critizised for inducing spurious cycles when filtering macroeconomic time series with the "typical spectral shape", the so-called Slutzky-effect. It is shown that the HP-filter is not subject to that critique and that the Slutzky-effect is a special case of a more general pattern of distortions of filters. Based on the theory of optimal filtering, we derive a frequency domain measure of the size of distortions when defining business cycles as cycles with a period less than a prespecified number of years. The metric is used for two purposes. First, to determine the optimal value of the smoothing parameter in the HP-filter. Secondly, to measure the size of distortions of ten filters including a new Hodrick-Prescott based band pass filter. The main conclusions are that the standard value of the smoothing parameter of the HP-filter, = 1600, is close to being the optimal value when filtering near-integrated time series and that the HP-filter is less distorting than any of the other filters studied.

Keywords: detrending; Hodrick-Prescott filter; Slutzky effect; optimal filtering; spectral analysis; business cycles (search for similar items in EconPapers)
JEL-codes: C22 E32 (search for similar items in EconPapers)
Pages: 17 pages
Date: 1998-06
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Citations: View citations in EconPapers (6)

Published in: Journal Econ Dynamics & Control 25(8) 2001, 1081-1101

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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:9809

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