We propose a procedure for representing a time series as the sum of a smoothly varying trend component and a cyclical component. We document the nature of the comovements of the cyclical components of a variety of macroeconomic time series. We find that these comovements are very different than the corresponding comovements of the slowly varying trend components.
THE PURPOSE OF THIS ARTICLE is to document some features of aggregate economic fluctuations sometimes referred to as business cycles. The investigation uses quarterly data from the postwar U. S. economy. The fluctuations studied are those that are too rapid to be accounted for by slowly changing demographic and technological factors and changes in the stocks of capital that produce secular growth in output per capita.
As Lucas (1981) has emphasized, aggregate economic variables in capitalist economies experience repeated fluctuations about their long-term growth paths. Prior to Keynes’ General Theory, the study of these rapid fluctuations, combined with the attempt to reconcile the observations with an equilibrium theory, was regarded as the main outstanding challenge of economic research. Although the Keynesian Rev
Support of the National Science Foundation is acknowledged. We also acknowledge helpful comments by the participants at the 1979 Summer Warwick Workshop on Expectation and the money workshops at the Universities of Chicago and Virginia and at Carnegie-Mellon University. In particular, we thank Robert Avery, V. V. Chari, Lars Peter Hansen, Charles R. Nelson, Thomas J. Sargent, Kenneth J. Singleton, and John H. Wood for comments. We also thank the Wharton Economic Forecasting Associates for providing the data.
This paper is substantially the same as our 1981 working paper. The only major change to the paper is the addition of an Appendix of Tables that mirror our originals and contain data ending in 1993. Since we did not update the citations, we apologize to the many authors who have used the Hodrick-Prescott filter and studied its properties in the intervening eighteen years since its original development.
ROBERT J. HODRICK is Nomura Professor of International Finance at the Graduate School of Business, Columbia University. EDWARD C. PRESCOTT is Regents’ Professor at the University of Minnesota and Advisor to the Federal Reserve Bank of Minneapolis. Both are research associates of the National Bureau of Economic Research.
Journal of Money, Credit, and Banking, Vol. 29, No. 1 (February 1997) Copyright 1997 by The Ohio State University Press