Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/104412 
Year of Publication: 
2014
Series/Report no.: 
Munich Discussion Paper No. 2014-2
Publisher: 
Ludwig-Maximilians-Universität München, Volkswirtschaftliche Fakultät, München
Abstract: 
On purpose to extract trend and cycle from a time series many competing techniques have been developed. The probably most prevalent is the Hodrick Prescott filter. However this filter suffers from diverse shortcomings, especially the subjective choice of its penalization parameter. To this point penalized splines within a mixed model framework offer the advantage of a data driven derivation of the penalization parameter. Nevertheless the Hodrick-Prescott filter as well as penalized splines fail to estimate trend and cycle when one deals with times series that contain structural breaks. This paper extends the technique of splines within a mixed model framework to account for break points in the data. It explains how penalized splines as mixed models can be used to avoid distortions caused by breaks and finally provides an empirical application to German data which exhibit structural breaks due to the reunification in 1990.
Subjects: 
penalized splines
mixed models
structural breaks
trends
flexible penalization
JEL: 
C22
C52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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