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Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles?

Alain Guay and Pierre Saint-Amant
Authors registered in the RePEc Author Service: Pierre St-Amant ()

Annals of Economics and Statistics, 2005, issue 77, 133-155

Abstract: The authors assess the ability of the Hodrick-Prescott filter (HP) and the band-pass filter proposed by Baxter and King (BK) to extract the business-cycle component of macroeconomic time series by using two different definitions of the business-cycle component. First, they define that component to be fluctuations lasting no fewer than 6 and no more than 32 quarters; this is the definition of business-cycle frequencies used by Baxter and King. Second, they define the business-cycle component on the basis of a decomposition of the series into permanent and transitory components. The conclusions are the same in both cases. The filters perform adequately when the spectrum of the original series has a peak at business-cycle frequencies. When the spectrum is dominated by low frequencies, the filters provide a distorted business cycle. These findings suggest that the use of the HP and BK filters with series having the typical Granger shape is highly problematic.

Date: 2005
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Working Paper: Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles? (1997) Downloads
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