NDLI: Reconciling Output Gaps: Unobserved Components Model and Hodrick-Prescott Filter

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Reconciling Output Gaps: Unobserved Components Model and Hodrick-Prescott Filter

Content Provider	Scilit
Author	Chan, Joshua C. C. Grant, Angelia
Copyright Year	2016
Description	Journal: SSRN Electronic Journal 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 new model provides comparable model fit relative to the standard correlated unobserved components model.
Related Links	https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2016-07/44_2016_chan_grant.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2811452
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.2811452
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2016-06-01
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Mathematical Social Sciences Trend-cycle Decomposition Hp Filter Structural Break
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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