In the working paper titled “Why You Should Never Use the Hodrick-Prescott Filter”, James D. Hamilton proposes an interesting new alternative to economic time series filtering. The
neverhpfilter package provides functions for implementing his solution. Hamilton (2017) <doi:10.3386/w23429>
Hamilton’s abstract offers an excellent introduction:
- The HP filter produces series with spurious dynamic relations that have no basis in the underlying data-generating process. (2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics. (3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice, e.g., a value for λ far below 1600 for quarterly data. (4) There’s a better alternative. A regression of the variable at date t + h on the four most recent values as of date t offers a robust approach to detrending that achieves all the objectives sought by users of the HP filter with none of its drawbacks.
Install from the Github master branch on R version >= 3.4.0.
Load the package
Read the vignette Reproducing Hamilton.
The package consists of 2 core functions documented here: