The HP-filter in cross-country comparisons

Albert Marcet and Morten Ravn

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Many empirical studies of business cycles have followed the practise of applying the Hodrick-Prescott filter for cross-country comparisons. The standard procedure is to set the weight \lambda, which determines the 'smoothness' of the trend equal to 1600. We show that if this value is used for against common wisdom about business cycles. As an example, we show that the long recession occurred inSpain between 1975 and 1985 goes unnotoced by the HP filter. We propose a method for adjusting \lambda by reinterpreting the HP-filter as the solution to a constrained minimization problem. We argue that the common practice of fixing \lambda across countries amounts to chankging the constraints on trend variability across countries. Our proposed method is easy to apply, retains all the virtues of the standard HP-filter and when applied to Spanish data the results are in the line with economic historian's view. Applying the method to a number of OECD countries we find that, with the exception of Spain, Italy and Japan, the standard choice of \lambda=1600 is sensible.

Keywords: Business cycles; cross-country comparisons; macroeconomic volatility (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2001-11, Revised 2003-12
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 (12)

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Related works:
Working Paper: The HP-Filter in Cross-Country Comparisons (2015)
Working Paper: The HP-Filter in Cross-Country Comparisons (2004)
Working Paper: The HP-Filter in Cross-Country Comparisons
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