It has been previously documented that the Hodrick–Prescott (HP) filter exhibits real-time instability such that the estimates of trend and cycle components from an aggregate time series are revised both as more data become available and previously available data are revised. An alternative to the HP filter has recently been suggested by Hamilton (Rev Econ Stat 100(5):831–843, 2018). The current article investigates and compares the HP and the Hamilton filters with respect to real-time stability in US GDP gap estimation. The results reveal that the Hamilton filter outperforms the HP filter when it comes to real-time revisions. The source of the inferior performance of the HP filter is found to be the fact that component estimates close to the end of the sample are revised to a large extent for the HP filter even when only a few more data points are added to the sample.
Business cycles HP filter Recursive estimation Real-time revisions
C15 C22 E32 E37
This is a preview of subscription content, log in to check access.
Cayen J-P, van Norden S (2005) The reliability of Canadian output-gap estimates. N Am J Econ Finance 16:373–393CrossRefGoogle Scholar
Cornea-Madeira A (2017) The explicit formula for the Hodrick–Prescott filter in a finite sample. Rev Econ Stat 99(2):314–318CrossRefGoogle Scholar
Hamilton JD (2018) Why you should never use the Hodrick–Prescott filter. Rev Econ Stat 100(5):831–843CrossRefGoogle Scholar
Hodrick RJ, Prescott EC (1981) Post-War U.S. business cycles: an empirical investigation. Discussion Paper #451, Northwestern UniversityGoogle Scholar
Hodrick RJ, Prescott EC (1997) Postwar U.S. business cycles: an empirical investigation. J Money Credit Bank 29(1):1–16CrossRefGoogle Scholar
Marcellino M, Musso A (2011) The reliability of real-time estimates of the euro area output gap. Econ Modell 28(4):1842–1856CrossRefGoogle Scholar
Mise E, Kim T-H, Newbold P (2005) On suboptimality of the Hodrick–Prescott filter at time series endpoints. J Macroecon 27(1):53–67CrossRefGoogle Scholar
Orphanides A, van Norden S (2002) The unreliability of output-gap estimates in real time. Rev Econ Stat 84(4):569–583CrossRefGoogle Scholar