The HP-Filter in Cross-Country Comparisons

Many empirical studies have applied the Hodrick-Prescott \u85lter in cross-country comparisons of business cycle uctuations. The Hodrick-Prescott \u85lter involves the smoothing parameter, , and standard practise in the literature is to set this parameter equal to 1600 (in quarterly data) for all countries. We show that this choice might distort the results when the cyclical comoponent is highly serially correlated, and that care should be taken in checking if the results are reasonable in the light of common wisdom. For example, for Spanish data we show that, contrary to conventional wisdom, the results imply that the Spanish cycle is very smooth and that the period of 1975-1985 was one of macroeconomic tranquility. We propose to recast the HP-\u85lter as a constrained minimization problem which selects endogenously a value of that imposes cross-country consistency of the imposed constraint. Our proposed method is easy to apply, retains all the virtues of the standard HP-\u85lter. When applied to Spanish data the results imply a return to conventional wisdom and we nd results in line with economic historians views. We also examine data for a number of OECD countries and \u85nd that, with the exception of Spain, Italy and Japan, the standard choice of = 1600 is sensible. JEL Classi\u85cations: C32, E3