A small but practically useful modification to the Hodrick–Prescott filtering: A note. Issue 17 (2nd September 2017)

• Record Type: Journal Article
• Authors: Yamada, Hiroshi
• Is Part Of: Communications in statistics. Volume 46:Issue 17(2017)
• Page Start: 8430
• Page End: 8434
• Publication Date: 2017-09-02
• Subjects: Hodrick–Prescott filtering -- ridge regression -- trend component -- Whittaker–Henderson method of graduation.; 62G05; C22; Mathematical statistics -- Periodicals; Mathematics; Statistics; 519.2
• DOI: 10.1080/03610926.2016.1179764
• Languages: English
• ISSNs: 0361-0926

Abstract

ABSTRACT: The Hodrick–Prescott (HP) filtering is widely applied to decompose macroeconomic time series, such as real Gross Domestic Product, into cyclical and trend components. This paper presents a small but practically useful modification to this approach. The reason why this modified filtering is of practical use is that it provides not only identical trend estimates as the HP filtering but also extrapolations of the trend. We provide a proof based on a ridge regression representation of the modified HP filtering. This is mainly because it enhances our understanding of the approach.