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On the Hamilton-HP Filter Controversy: Evidence from German Business Cycles

Author

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  • Lars-H. R. Siemers

    (University of Siegen, Department of Economics)

Abstract

James Hamilton put doubt on the quality of the HP filter estimates, and proposed an alternative regression approach to decompose trend and cycle of time series (H filter). We investigate the new H filter in detail and compare it to the HP filter. We apply both to German GDP time series. We find that in times of huge shocks the regular H filter produces unreliable trends. Its Quast-Wolters modification (QWH filter), in contrast, does not suffer from this issue. Checking expert benchmark congruency, we find that this modification outperforms all parameter constellations of the standard H filter. With a benchmark-specific adequate choice of the smoothing factor, in turn, the HP filter outperforms the H filter. The H filter, however, outperforms the HP filter with regard to correlation with expert benchmark recession dating. And the H filter uniquely outperforms the HP filter in capturing the gap-inflation link, an issue especially important for central banks. Overall, our results suggest using the QWH filter among the H filter options, and a smoothing factor of 38 for the HP filter.

Suggested Citation

  • Lars-H. R. Siemers, 2024. "On the Hamilton-HP Filter Controversy: Evidence from German Business Cycles," MAGKS Papers on Economics 202421, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202421
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    File URL: https://www.uni-marburg.de/en/fb02/research-groups/economics/macroeconomics/research/magks-joint-discussion-papers-in-economics/papers/2024/21-2024-lars-h-r-siemers.pdf
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    More about this item

    Keywords

    Hamilton filter; HP filter; expert-benchmark congruency; gap-inflation link; spectral analysis.;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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