A small but practically useful modification to the Hodrick–Prescott filtering: A note

Hiroshi Yamada

Communications in Statistics - Theory and Methods, 2017, vol. 46, issue 17, 8430-8434

Abstract: The Hodrick–Prescott (HP) filtering is widely applied to decompose macroeconomic time series, such as real Gross Domestic Product, into cyclical and trend components. This paper presents a small but practically useful modification to this approach. The reason why this modified filtering is of practical use is that it provides not only identical trend estimates as the HP filtering but also extrapolations of the trend. We provide a proof based on a ridge regression representation of the modified HP filtering. This is mainly because it enhances our understanding of the approach.

Date: 2017
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DOI: 10.1080/03610926.2016.1179764

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