Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/215404
Authors: 
Wolf, Elias
Mokinski, Frieder
Schüler, Yves
Year of Publication: 
2020
Series/Report no.: 
Bundesbank Discussion Paper No. 11/2020
Abstract: 
We show that one should not use the one-sided Hodrick-Prescott filter (HP-1s) as the real-time version of the two-sided Hodrick-Prescott filter (HP-2s): First, in terms of the extracted cyclical component, HP-1s fails to remove low-frequency fluctuations to the same extent as HP-2s. Second, HP-1s dampens fluctuations at all frequencies - even those it is meant to extract. As a remedy, we propose two small adjustments to HP-1s, aligning its properties closely with HP-2s: (1) a lower value for the smoothing parameter and (2) a multiplicative rescaling of the extracted cyclical component. For example, for HP-2s with = 1,600 (value of smoothing parameter), the adjusted one-sided HP filter uses = 650 and rescales the extracted cyclical component by a factor of 1:1513. Using simulated and empirical data, we illustrate the relevance of the adjustments. For instance, financial cycles may appear 1.7 times more volatile than business cycles, where in fact volatilities differ only marginally.
Subjects: 
Real-time analysis
detrending
business cycles
financial cycles
JEL: 
C10
E32
E58
G01
ISBN: 
978-3-95729-681-8
Document Type: 
Working Paper

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