On Adjusting the One-Sided Hodrick-Prescott Filter

19 Pages Posted: 27 Mar 2020

See all articles by Elias Wolf

Elias Wolf

Free University of Berlin (FUB)

Frieder Mokinski

Deutsche Bundesbank

Yves Stephan Schüler

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 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 lambda = 1,600 (value of smoothing parameter), the adjusted one-sided HP filter uses lambda_star = 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.

Keywords: Real-time analysis, detrending, business cycles, financial cycles

JEL Classification: C10, E32, E58, G01

Suggested Citation

Wolf, Elias and Mokinski, Frieder and Schüler, Yves Stephan, On Adjusting the One-Sided Hodrick-Prescott Filter (January 21, 2020). Available at SSRN: https://ssrn.com/abstract=3536248 or http://dx.doi.org/10.2139/ssrn.3536248

Elias Wolf

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

Frieder Mokinski

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Yves Stephan Schüler (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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