Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179353
Authors: 
Schüler, Yves S.
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper 2138
Abstract: 
I show that the detrending of financial variables with the Hodrick and Prescott (1981, 1997) (HP) and band-pass filters leads to spurious cycles. I find that distortions become especially severe when considering medium-term cycles, i.e., cycles that exceed the duration of regular business cycles. In particular, these medium-term filters amplify the variances of cycles of duration around 20 to 30 years up to a factor of 204, completely cancelling out shorter-term fluctuations. This is important because it is common practice, and recommended under Basel III, to extract medium-term cycles using such filters; e.g., the HP filter with a smoothing parameter of 400,000. In addition, I find that financial cycle facts, i.e., differing amplitude, duration, and synchronisation of cycles in financial variables relative to cycles in GDP, are robust. For HP and band-pass filters, differences to GDP become marginal due to spurious cycles.
Subjects: 
Macroprudential policy
Detrending
Spurious cycles
Financial cycles
Credit-to-GDP gap
JEL: 
C10
E32
E44
E58
G01
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3243-1
Document Type: 
Working Paper

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