Assesing Hp Filter Performance for Argentina and U.S. Macro Aggregates

Journal of Applied Economics, Vol. 3, No. 2, pp. 257-284, November 2000

Posted: 18 May 2004

See all articles by Hildegart Ahumada

Hildegart Ahumada

Universidad Torcuato Di Tella - School of Government

Maria Lorena Garegnani

Central Bank of Argentina; Universidad Nacional de La Plata - Department of Economics

Abstract

Hodrick-Prescott filter has been the favourite empirical technique among researchers studying cycles. Software facilities and the optimality criterion, from which the filter can be derived, can explain its wide use. However, different shortcomings and drawbacks have been pointed out in the literature, as alteration of variability and persistence and detecting spurious cycles and correlations. This paper discusses these criticisms from an empirical point of view trying to clarify what the filter can and cannot do. In particular, a less mechanical use for descriptive analysis is proposed: testing how the estimated cyclical component behaves and using autocorrelation adjusted standard errors to evaluate cross correlations to differentiate the genuine from spurious case. Simulation results to test these bivariate correlations when there is a genuine relationship are presented. Some examples of descriptive analysis for macro aggregates (real activity, trade flows and money) of Argentina and USA are reported to show that not always the filter is appropriate. Simple tools are used to appreciate how the filtered series result and to evaluate cross correlations.

Keywords: HP filter, cycles, spurious cycles, genuine cross correlation

JEL Classification: C4, E3

Suggested Citation

Ahumada, Hildegart and Garegnani, Maria Lorena, Assesing Hp Filter Performance for Argentina and U.S. Macro Aggregates. Journal of Applied Economics, Vol. 3, No. 2, pp. 257-284, November 2000, Available at SSRN: https://ssrn.com/abstract=547305

Hildegart Ahumada (Contact Author)

Universidad Torcuato Di Tella - School of Government ( email )

C1428ATG Buenos Aires
Argentina

Maria Lorena Garegnani

Central Bank of Argentina ( email )

Reconquista 266
Edificio Central, piso 7
Buenos Aires, 1003
Argentina

Universidad Nacional de La Plata - Department of Economics ( email )

1900 La Plata, Buenos Aires 1900
Argentina

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