Band-pass filtering, cointegration, and business cycle analysis
Luca Benati ()
Bank of England working papers from Bank of England
This paper critically assesses the practice of band-pass filtering (the non-structural, frequency-domain based decomposition of economic time series into trend and cyclical components), making two main points. First, it is shown that: (a) depending on the stochastic properties of the filtered process, the band-pass filtered cyclical component is entirely authentic, partly or mostly spurious, or even entirely spurious; and (b) as a simple consequence of the Lucas critique, the degree of authenticity of band-pass filtered cyclical components crucially depends on the monetary rule followed by the policy-maker. Second, taking a number of macroeconomic models as data-generation processes it is shown that band-pass filtering: (a) may markedly distort key business cycle stylised facts, as captured by the cross-correlations and the cross-spectral statistics between the cyclical components of the variables of interest and the cyclical component of GDP; and (b) may well create entirely spurious stylised facts. For example: both productivity and the money supply may appear procyclical even when they follow random walks by construction; the real wage may appear procyclical when in fact it is countercyclical; in general, the Phillips correlation between inflation and the cyclical component of economic activity will appear weaker than it is in reality. Again, the degree of authenticity of business cycle stylised facts uncovered via band-pass filtering crucially depends on the monetary rule followed by the policy-maker.
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20) Track citations by RSS feed
Downloads: (external link)
http://www.bankofengland.co.uk/archive/Documents/h ... apers/2001/wp142.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2001/wp142.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2001/wp142.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:142
Access Statistics for this paper
More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().