Why You Should Never Use the Hodrick-Prescott Filter. A Comment on Hamilton (The Review of Economics and Statistics, 2018)

Abstract

Hamilton (2018) argues that one should never use the Hodrick-Prescott (HP) filter to detrend economic time series and proposes an alternative approach. This comment reevaluates Hamilton's case by showing that his preferred method shares the main drawbacks of the HP filter: filter-induced dynamics in the estimated cycles and arbitrariness in the choice of a filter-defining parameter. In addition, the Hamilton trend lags the data by construction, leading to peculiar timing properties. Therefore, it seems unlikely that the Hamilton filter improves on the HP filter in practice.