Optimal HP filtering for South Africa
Stellenbosch Working Paper Series No. WP07/2008Publication date: 2008
Author(s):
Among the various methods used to identify the business cycle from aggregate data, the Hodrick-Prescott filter has become an industry standard – it ‘identifies’ the business cycle by removing low-frequency information, thereby smoothing the data. Since the filter’s inception in 1980, the value of the smoothing constant for quarterly data has been set at a ‘default’ of 1600, following the suggestion of Hodrick and Prescott (1980). This paper argues that this ‘default value’ is inappropriate due to its ad hoc nature and problematic underlying assumptions. Instead this paper uses the method of optimal filtering, developed by Pedersen (1998, 2001, and 2002), to determine the optimal value of the smoothing constant for South Africa. The optimal smoothing constant is that value which least distorts the frequency information of the time series. The result depends on both the censoring rule for the duration of the business cycles and the structure of the economy. The paper raises a number of important issues concerning the practical use of the HP filter, and provides an easily replicable method in the form of MATLAB code.
JEL Classification:C22, E32
Keywords:Hodrick-Prescott filter, Spectral analysis, Ideal filtering, Optimal filtering, Distortionary filtering, Business cycles, MATLAB
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Upcoming Seminars
Monday 28 July 202512:00-13:00
Dr Neil Rankin: Ceo Of Predictive Insights & Stellenbosch University
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12:00-13:00
Prof Willem Boshoff
Topic: "Two competing approaches in South African competition policy: merger control and anti-cartel enforcement over the past 30 years"
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Prof Derek Yu: University Of The Western Cape
Topic: "Examining the teaching, assessment and research activities of the South African Economics Departments"
BER Weekly
13 Jun 2025 Another global flashpoint ignites as Israel attacks Iran’s nuclear facilitiesThe story for the week was initially relatively positive, with the overarching narrative being that the US and China agreed on a trade truce. However, overnight, Israel struck Iran’s nuclear facilities, military sites and killed senior commanders in dozens of strikes. While Israel has attacked Iran before, this is the first time nuclear facilities were...
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