Abstract
The Hodrick-Prescott filter is widely used to extract cyclical movements about trend in macroeconomic time series. The filter is based on the assumption that nonstationary movements in time series are captured by smooth and slowly changing trends. This note shows that applying the Hodrick-Prescott filter to time series with stochastic trends may extract cyclical movements which are entirely spurious.
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I would like to thank Andrew Harvey, Robert Kunst, and Klaus Neusser for helpful comments on earlier versions of this note. The usual disclaimer applies.