Estimation of the business cycle: A modified Hodrick-Prescott filter

Hodrick-Prescott (HP) filtering of (most often, seasonally adjusted) quarterly series is analysed. Some of the criticism to the filter are adressed. It is seen that, while filtering strongly affects autocorrelations, it has little effect on crosscorrelations. It is argued that the criticism that HP filtering induces a spurious cycle in the series is unwarranted. The filter, however, presents two serious drawbacks: First, poor performance at the end periods, due to the size of the revisions in preliminary estimators, and, second, the amount of noise in the cyclical signal, which seriously disturbs its interpretation. We show how the addition of two model-based features (in particular, applying the filter to the series extended with proper ARIMA forecasts and backcasts, and using as input to the filter the trend-cycle component instead of the seasonally adjusted series) can considerably improve the filter performance. Throughout the discussion, we use a computationally and analytically convenient alternative derivation of the HP filter, and illustrate the results with an example consisting of 4 Spanish economic indicators.     

Hedging effectiveness comparisons: A note

This note examines the hedging effectiveness of three hedge strategies on twenty-four commodity and financial markets. Lien (Lien, D., 2005a, The use and abuse of the hedging effectiveness measure, International Review of Financial Analysis 14, 277–282, Lien, D., 2005b, A note on the superiority of the OLS hedge ratio, Journal of Futures Markets 25, 1121–1126.) suggest that, absent from estimation errors, the minimum variance (MV) hedge ratio attains the maximum post-sample hedging effectiveness when there is no structural change across estimation and comparison samples. When comparing the MV strategy with the naïve hedge ratio, we find sufficiently strong support for the conclusion. On the other hand, driven by estimation errors, weaker support is produced when comparing MV and error correction (EC) hedge strategy.     

Marx on entrepreneurship: A note

This paper argues that in mainstream economics the concept of entrepreneurship is imposed by the theoretical framework adopted in order to justify the source of profits. In contrast, in Marx’s analysis there is a consistent theory of profit which inevitably leads to a specific theory of entrepreneurship. (JEL: B10, B14, B21)     

Factor analysis and development: A note

In recent applications of factor analysis, the researchers have included more variables than observations in identifying the patterns of development. It is shown here that when the number of variables exceeds the number of observations in factor analysis, the derived results suffer from spuriousness.     

The Verdoorn law revisited: A note

In his Fattori che regolano lo sviluppo della produttività del lavoro Verdoorn (1949) presented empirical evidence on the constancy of the ratio of productivity growth to output growth. As a theoretical underpinning he used a neoclassical growth model. The main purpose of this paper is to emphasize that in this model the ratio is constant only in the steady state. If Verdoorn's underpinning of his law is to be correct, the steady-state assumption should be empirically tested. Some available evidence for Verdoorn's sample appears to throw doubt upon this assumption.     

Multiplicative habit formation and consumption: A note

A multiplicative form of the habit term in the utility function has some undesirable properties if the habit function is itself still additive (Wendner, 2003). A geometric form for the way the stock of habit accumulates can resolve these shortcomings.     

Competing macro-hypotheses in the United States: A Kalman filtering approach

The empirical validity of alternative views about the short-run determinants of real output growth in the United States is investigated. A nested framework is used to test the macro rational expectations (MRE) hypothesis directly against two competing hypotheses - the neo-Keynesian view that anticipated and unanticpated monetary policy both matter,and Friedman's (1977) proposition that increased inflation uncertainty reduces real output at least temporarily. The unobservable explanatory variables are obtained from time-varying-parameter models of inflation and money growth, which generate forecast errors and their conditional variances consistent with rational expectations under a continuously chaning policy regime. The empirical results strongly support Friedman's view. The MRE hypothesis must be rejected since both anticipated and unanticipated monetary changes matter. The results prove robust across different model specifications and estimation techniques.     

Estimation in sequential decisionmaking models: A methodological note

The purpose of this note is to develop an appropriate model of behavior and a statistical technique for estimating it for individuals who make sequential decisions under uncertainty. The distinctive aspect of this model is that differences among individuals are reflected in their behavior rather than being swept into the error term.     

Capital risk and consumption puzzles: A pedagogical note

A two-period consumption model with an ordinal certainty equivalent preference is developed to characterize the comparative static effect of an increase in uncertainty of investment returns on the riskfree interest rate, the equity premium, expected growth of consumption, and the marginal propensity to consume out of current income. The results reconcile a few often reported consumption-related anomalies.     

IS-LM stability and economic policy effectiveness: A note

Accepting the findings of Weber (1970) and Yarrow (1975), Cebula finds that conventional fiscal policy has its usual positive effect on the level of income while monetary policy has a negative impact. This paper shows that if a budget constraint of the specific, simplified form G ? T = ΔM is added to the model, the results differ from Cebula's.     

Optimal privatization and uniform subsidy policies: A note

The privatization neutrality theorem states that the share of public ownership in a firm does not affect welfare under an optimal uniform tax‐subsidy policy. We revisit this neutrality result. First, we investigate the case in which the private firm is domestic. We show that this neutrality result does not hold unless public and private firms have the same cost function. Next, we investigate a case in which both domestic and foreign investors own the private firm. We show that the optimal degree of privatization is never zero, and thus, the neutrality result does not hold, even when there is no cost difference between public and private firms.     

Measuring shock persistence in Austrian unemployment: A note

Zusammenfassung Die Arbeit untersucht unter Verwendung von Techniken der Zeitreihenanalyse Persistenzeigenschaften der Arbeitslosenrate in Österreich. Dabei zeigt sich, daß Schocks in der Arbeitslosenrate langfristig erhalten bleiben, sodaß — lose formuliert — gute und schlechte Arbeitsmarktgleichgewichte in Abhängigkeit von der Geschichte des Prozesses existieren dürften.

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We would like to thank A. Jäger and R. Kunst for helpful comments.