What is Hodrick-Prescott decomposition?

The Hodrick–Prescott filter (also known as Hodrick–Prescott decomposition) is a mathematical tool used in macroeconomics, especially in real business cycle theory, to remove the cyclical component of a time series from raw data.

Why you should never use the Hodrick-Prescott filter ∗?

(a) The Hodrick-Prescott (HP) filter introduces spurious dynamic relations that have no basis in the underlying data-generating process. (b) Filtered values at the end of the sample are very different from those in the middle and are also characterized by spurious dynamics.

What is a one sided HP filter?

As a “one-sided” or “real-time” filter, HP-1s uses only observations. dated t and earlier to filter the time-series observation yt.

Why you should use the HP filter?

The credit gap, defined as the deviation of the credit-to-GPD ratio from a Hodrick-Prescott (HP) filtered trend, is a powerful early warning indicator for predicting crises. Basel III therefore suggests that policymakers should use it as part of their countercyclical capital buffer frameworks.

What is Baxter King filter?

The Baxter-King filter is a band pass filter that removes the cycle component S from the time series Y based on weighted moving average with specified weights. To calculate weights, the user should set cutoff frequencies that describe permissible non-seasonal oscillations of the smoothed series.

What is the Hamilton filter?

Abstract. Hamilton (2018) proposes a regression filter (Hamilton filter) as an alternative to the Hodrick-Prescott filter (HP filter). He argues that the Hamilton filter meets all the objectives desired by users of the HP filter while avoiding the HP filter’s drawbacks.

What are filters in time series?

Filtering a time series means removal of the spectral power at some chosen frequencies while retaining other frequencies. A high-pass filter retains higher frequencies while removing low frequencies; a low-pass filter does the opposite. A band-pass filter removes all frequencies outside a prespecified band.

What is the use of filters in time series analysis?

Filtering a time series means removal of the spectral power at some chosen frequencies while retaining other frequencies. A high-pass filter retains higher frequencies while removing low frequencies; a low-pass filter does the opposite.