Wednesday, July 26, 2017

Hamilton’s “Why you should never use the Hodrick-Prescott Filter”

Professor James D. Hamilton requires no introduction, having been one of the most important researchers in time series econometrics for decades.
Over the past few years, Hamilton has been working on a paper calling on applied economists to abandon the ubiquitous Hodrick-Prescott Filter and replace it with a much simpler method of extracting trend and cycle information from a time series.
This paper has become popular, and a number of our users have asked how to replicate it in EViews. One of our users, Greg Thornton, has written an EViews add-in (called Hamilton) that performs Hamilton’s method.  However, given its relative simplicity, we thought we’d use a blog post to show manual calculation of the method and replicate the results in Hamilton’s paper.