DETRENDING, STYLIZED FACTS AND THE BUSINESS-CYCLE

The stylized facts of macroeconomic time series can be presented by fi tting structural time series models, Within this framework, we analyse the consequences of the widely used detrending technique popularised by Hodrick and Prescott (1980). It is shown that mechanical detrending based on the Hodrick-Prescott filter can lead investigators to report spurious cyclical behaviour, and this point is illustrated with empir ical examples. Structural time-series models also allow investigators to deal explicitly with seasonal and irregular movements that may dist ort estimated cyclical components. Finally, the structural framework p rovides a basis for exposing the limitations of ARIMA methodology and models based on a deterministic trend with a single break.