Why You Should Never Use the Hodrick-Prescott Filter
James Douglas Hamilton · National Bureau of Economic Research · 2017
Here's why.(1) The HP filter produces series with spurious dynamic relations that have no basis in the underlying data-generating process.(2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics.(3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice, e.g., a value for λ far below 1600 for quarterly data.(4) There's a better alternative.A regression of the variable at date t+h on the four most recent values as of date t offers a robust approach to detrending that achieves all the objectives sought by users of the HP filter with none of its drawbacks.