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Estimating Trends with Percentage of Smoothness Chosen by the User
Author(s) -
Guerrero Victor M.
Publication year - 2008
Publication title -
international statistical review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.051
H-Index - 54
eISSN - 1751-5823
pISSN - 0306-7734
DOI - 10.1111/j.1751-5823.2008.00047.x
Subject(s) - smoothness , hodrick–prescott filter , smoothing , filter (signal processing) , constant (computer programming) , series (stratigraphy) , econometrics , computer science , business cycle , mathematics , index (typography) , statistics , mathematical optimization , economics , mathematical analysis , paleontology , keynesian economics , computer vision , programming language , world wide web , biology
Summary This work presents a method for estimating trends of economic time series that allows the user to fix at the outset the desired percentage of smoothness for the trend. The calculations are based on the Hodrick‐Prescott (HP) filter usually employed in business cycle analysis. The situation considered here is not related to that kind of analysis, but with describing the dynamic behaviour of the series by way of a smooth curve. To apply the filter, the user has to specify a smoothing constant that determines the dynamic behaviour of the trend. A new method that formalizes the concept of trend smoothness is proposed here to choose that constant. Smoothness of the trend is measured in percentage terms with the aid of an index related to the underlying statistical model of the HP filter. Empirical illustrations are provided using data on Mexico's GDP.