Filtering economic time series: On the cyclical properties of Hamilton’s regression filter and the Hodrick-Prescott filter

Yves Schueler
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Yves Schueler: Deutsche Bundesbank
Authors registered in the RePEc Author Service: Yves Stephan Schüler

Review of Economic Dynamics, 2024, vol. 54

Abstract: The Hamilton (H) filter is proposed as an alternative to the Hodrick-Prescott (HP) filter. It is designed to meet all of the objectives desired by users of the HP filter while avoiding its drawbacks (spurious dynamics, ad hoc filter settings, end-of-sample bias). I document a trade-off that has been overlooked: Addressing the HP filter's drawbacks means that the H filter cannot fulfill all of the desired objectives. It modifies different frequencies captured in an estimated cyclical component by inducing phase shifts and by likely altering variances. Typically, these modifications vary across time series. Through both simulation and real data exercises, I illustrate each filter's cyclical properties. (Copyright: Elsevier)

Keywords: Business cycles; Detrending; Band pass filter; Forecast errors; Spurious cycles (search for similar items in EconPapers)
JEL-codes: C10 E32 E58 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.red.2024.101237

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