Economic Growth and Business Cycles: A Critical Comment on Detrending Time Series (Revised Version)

Klaus Reiner Schenk-Hoppé ()

No iewwp054, IEW - Working Papers from Institute for Empirical Research in Economics - IEW

Abstract: 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.

Keywords: detrending; business cycles; growth (search for similar items in EconPapers)
JEL-codes: E32 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-dge
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