We agree that either mistaking a stochastic trend for a deterministic trend (or vice-versa) is consequential for unit root tests and for tests of nonlinear serial dependence. In addition, we comment that similar results obtain for ordinary parameter inference in simple linear models. In particular, we note that detrending stochastically trended data with a deterministic polynomial or by applyin...

Penalized splines are widespread tools for the estimation of trend and cycle, since they allow a data driven estimation of the penalization parameter by the incorporation into a linear mixed model. Based on the equivalence of penalized splines and the Hodrick-Prescott filter, this paper connects the mixed model framework of penalized splines to the WienerKolmogorov filter. In the case that tren...

In this paper we pursue an approach based on economic theory to illustrate possible shortcomings of widely used detrending methods. We analyze a simple model of economic growth and business cycles in which investment and technical progress are stochastic. The Hodrick-Prescott and the Baxter-King filter are shown to detect spurious business cycles that are not related to actual cycles in the mod...

In this paper we examine if the use of Hamilton’s regression filter significantly modifies cyclical components concerning unemployment in Greece compared with those using Hodrick–Prescott double (HP). Hamilton suggested a order to overcome some drawbacks HP filter, which contains presence false cycles, bias end sample, and ad-hoc assumptions for parameters’ smoothing. Thus, our examines two wid...

The Hodrick-Prescott (HP) filter has become a widely used tool for detrending integrated time series in applied econometric analysis. Even though the theoretical time series literature sums up an extensive catalogue of severe criticism against an econometric analysis of HP filtered data, the original Hodrick and Prescott (1980, 1997) suggestion to measure the strength of association between (ma...

There is still debate about the role of monetary aggregates (money demand) and their nature in domestic economy, whether there a direct affect indirect affect. After 2008 crisis, became policy tool that played an important maintaining economic stability. This study aims to examine macroeconomic variables on demand for money Indonesia from 2000Q1-2021Q4 using VECM approach. The business cycle us...

the effect of symmetric (non-symmetric) foreign exchange rate shocks on iranian agricultural import and exports was explored throughout the current research.. time series of 1973-2007 along with hodrick and prescott filter method were employed. the results as obtained through vector error correction and johnson model indicated that positive (negative) shocks introduce positive (negative) effect...

The Hodrick-Prescott filter is the probably most popular tool for trend estimation in economics. Compared to other frequently used methods like the Baxter-King filter it allows to estimate the trend for the most recent periods of a time series. However, the HodrickPrescott filter suffers from an increasing excess variability at the margins of the series inducing a too flexible trend function at...