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Are Hodrick-Prescott `forecasts' rational?

Ash, J. C. K., Easaw, Joshy, Heravi, Saeed and Smyth, D. J. 2002. Are Hodrick-Prescott `forecasts' rational? Empirical Economics 27 (4) , pp. 631-643. 10.1007/s001810100107

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Abstract

We evaluate the usefulness of the Hodrick-Prescott (HP) filter as a proxy for rational expectations, using long runs of annual US inflation data. Our conclusion is that while the HP series are not fully rational in the sense of Muth (1961), they do generally meet the criterion of `weak rationality' recently proposed by Grant and Thomas (1999). They are also rational proxy predictors of direction for, following Merton (1981), agents would not change their prior in the opposite direction to these `forecasts'. However, smoother HP `forecasts' are more prone to inefficiency and less useful predictors of direction.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Uncontrolled Keywords: Hodrick-Prescott filter; Rational expectations; Proxy forecasts; Inflation
Publisher: Springer
ISSN: 0377-7332
Last Modified: 04 Jun 2017 04:25
URI: http://orca-mwe.cf.ac.uk/id/eprint/38652

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