Real Business Cycles

Chapter 32Detrending, Stylized Facts and the Business Cycle

Journal of Applied Econometrics

A. C. HARVEY

Department of Statistics, London School of Economics, Houghton Street, London WC2A 2AE, UK

AND

A. JAEGER

Austrian Institute of Economic Research, A-1103 Vienna, PO Box 91, Austria

Summary

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 ...