TY - JOUR
T1 - Reconciling output gaps: Unobserved components model and Hodrick-Prescott filter
AU - Grant, Angelia
AU - Chan, Chi Chun (Joshua)
PY - 2017
Y1 - 2017
N2 - This paper reconciles two widely used trend-cycle decompositions of GDP that give markedly different estimates: the correlated unobserved components model yields output gaps that are small in amplitude, whereas the Hodrick-Prescott (HP) filter generates large and persistent cycles. By embedding the HP filter in an unobserved components model, we show that this difference arises due to differences in the way the stochastic trend is modeled. Moreover, the HP filter implies that the cyclical components are serially independent—an assumption that is decidedly rejected by the data. By relaxing this restrictive assumption, the augmented HP filter provides comparable model fit relative to the standard correlated unobserved components model.
AB - This paper reconciles two widely used trend-cycle decompositions of GDP that give markedly different estimates: the correlated unobserved components model yields output gaps that are small in amplitude, whereas the Hodrick-Prescott (HP) filter generates large and persistent cycles. By embedding the HP filter in an unobserved components model, we show that this difference arises due to differences in the way the stochastic trend is modeled. Moreover, the HP filter implies that the cyclical components are serially independent—an assumption that is decidedly rejected by the data. By relaxing this restrictive assumption, the augmented HP filter provides comparable model fit relative to the standard correlated unobserved components model.
U2 - 10.1016/j.jedc.2016.12.004
DO - 10.1016/j.jedc.2016.12.004
M3 - Article
VL - 75
SP - 114
EP - 121
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
ER -