James Hamilton, 22 June 2017

In economic research, the Hodrick-Prescott filter is a widely used tool for removing cyclical components from time-series data. This column argues that, despite its popularity, the HP filter has serious drawbacks that should severely restrict its application. It involves several levels of differencing, so that for random walk series, subsequently observed patterns are likely to be artefacts of having applied the filter, rather than due to the underlying data-generating process. The column goes on to suggest an alternative to the HP filter that avoids these pitfalls. 

Longfeng Ye, Peter Robertson, 01 February 2016

The World Bank has identified 37 countries as being in a ‘middle-income trap’, but few formal tests of the middle-income trap hypothesis exist. This column presents a new test based on a more nuanced observation that incorporates information on a country’s long-run growth path. Only seven out of 46 middle-income countries are found to be potentially ‘trapped’. Some countries that are usually considered to be trapped may just be growing very slowly.

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