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Bloechl, Andreas (Januar 2014): Reducing the Excess Variability of the Hodrick-Prescott Filter by Flexible Penalization. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2014-1
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Abstract

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 Hodrick- Prescott filter suffers from an increasing excess variability at the margins of the series inducing a too flexible trend function at the margins compared to the middle. This paper will tackle this problem using spectral analysis and a flexible penalization. It will show that the excess variability can be reduced immensely by a flexible penalization, while the gain function for the middle of the time series is used as a measure to determine the degree of the flexible penalization.