A Complete Model-Based Interpretation of the Hodrick-Prescott Filter: Spuriousness Reconsidered

Regina Kaiser () and Agustin Maravall ()
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Regina Kaiser: Universidad Carlos III de Madrid

No 208, Working Papers from Banco de España

Abstract: The Hodrick-Prescott filter applied to seasonally adjusted series has become a paradigm for business-cycle estimation at many economic agencies and institutions. We show that the filter can be obtained from MMSE estimation of the components in an unobserved component model, where the original series is decomposed into (long-term) trend, cyclical, seasonal, and (highlytransitory) irregular components. The component models are sensible and combine desirable “ad-hoc” features with series-dependent features that guarantee consistency with the data. The model-based framework provides improvements having to do with the precision of end-point estimation and the stability of the cyclical signal.

Keywords: Business-cycle estimation; Stochastic cycles and trends; Unobserved Component Models; ARIMA models (search for similar items in EconPapers)
Pages: 31 pages
Date: 2002-03
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0208

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