Hodrick-Prescott (HP) Filter

What Is the Hodrick-Prescott (HP) Filter?

The Hodrick-Prescott (HP) filter alludes to a data-smoothing technique. The HP filter is ordinarily applied during analysis to eliminate short-term variances associated with the business cycle. Removal of these short-term changes uncovers long-term trends. This can assist with economic or other forecasting associated with the business cycle.

Grasping the Hodrick-Prescott (HP) Filter

The Hodrick-Prescott (HP) filter is a device ordinarily utilized in macroeconomics. It is named after economists Robert Hodrick and Edward Prescott who previously promoted this filter in economics during the 1990s. Hodrick was an economist who specialized in international finance. Prescott won the Nobel Memorial Prize, sharing it with one more economist for their research in macroeconomics.

This filter determines the long-term trend of a period series by discounting the significance of short-term price changes. In practice, the filter is utilized to smooth and detrend the Conference Board's Help Wanted Index (HWI) so it tends to be benchmarked against the Bureau of Labor Statistic's (BLS) JOLTS, an economic data series that may all the more precisely measure job opportunities in the U.S.

The HP filter is a device generally utilized in macroeconomics.

Special Considerations

The HP filter is quite possibly of the most widely involved apparatus in macroeconomic analysis. It will in general have ideal outcomes in the event that the noise is distributed ordinarily, and when the analysis being led is historical.

As indicated by a paper distributed by economist and teacher James Hamilton — which shows up on the National Bureau of Economic Research site — there are several justifications for why the HP filter ought not be utilized. Hamilton initially suggests that the filer produces results that have no basis during the time spent generating data. He likewise states that the values that are filtered at the example's end are entirely unexpected from those in the middle.

Features

• It is ordinarily applied during analysis to eliminate short-term variances associated with the business cycle.
• In practice, it is utilized to smooth and detrend the Conference Board's Help Wanted Index so it tends to be benchmarked against the Bureau of Labor Statistic's JOLTS, which measures job opportunities in the U.S.
• The Hodrick-Prescott filter alludes to a data-smoothing technique utilized principally in macroeconomics.