THE ROLE OF DETRENDING METHODS IN A MODEL OF REAL BUSINESS CYCLES

This paper examines three detrending methods in a real business cycle (RBC) model: the Hodrick-Prescott (HP) filler, the Beveridge-Nelson (B N) filter, and the Linear-in-Time (LIT) filter. The HP filter is posit ed in between the other two, in tile sense that the trend from the HP filter is rather smooth with some variation, whereas tile trend from t he LIT filter is perfectly smooth and the trend from the BN filter inc ludes a unit-root component. The HP filter fails to work as a band-pas s filter if the pre-filtered series is integrated, and the failure dee pens as the degree of integration becomes higher. However, the filter- oriented sensitivity of the stylized facts are symmetric between the a ctual data and the simulated data, implying that the sensitivity itsel f does not invalidate an RBC model's performance in replicating the ac tual economy.