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Detrending, stylized facts and the business cycle
Author(s) -
Harvey A. C.,
Jaeger A.
Publication year - 1993
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950080302
Subject(s) - stylized fact , spurious relationship , hodrick–prescott filter , econometrics , business cycle , series (stratigraphy) , economics , autoregressive integrated moving average , seasonal adjustment , point (geometry) , filter (signal processing) , computer science , time series , macroeconomics , mathematics , variable (mathematics) , machine learning , geology , paleontology , mathematical analysis , geometry , computer vision
The stylized facts of macroeconomic time series can be presented by fitting structural time series models. Within this framework, we analyse the consequences of the widely used detrending technique popularised by Hodrick and Prescott (1980). It is shown that mechanical detrending based on the Hodrick–Prescott filter can lead investigators to report spurious cyclical behaviour, and this point is illustrated with empirical examples. Structural time‐series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components. Finally, the structural framework provides a basis for exposing the limitations of ARIMA methodology and models based on a deterministic trend with a single break.