Skip to main content
SpringerLink
Log in

Are Hodrick-Prescott `forecasts' rational?

  • Published:
Empirical Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Author information

Authors and Affiliations

  1. Department of Economics, University of Reading, PO Box 218, Whiteknights, Reading, Berks, RG6 6AA, England., , , , , , GB

    J. C. K. Ash

  2. Department of Economics, University of Bath, Claverton Down, Bath, BA2 7AY, England, , , , , , GB

    J. Z. Easaw

  3. Cardiff Business School, University of Wales, Aberconway Building, Colum Drive, Cardiff, CF1 3EU., , , , , , GB

    S. M. Heravi

  4. Economics Group, Middlesex University Business School, The Burroughs, Hendon, London NW4 4BT, England., , , , , , GB

    D. J. Smyth

Authors
  1. J. C. K. Ash
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. J. Z. Easaw
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. S. M. Heravi
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. D. J. Smyth
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

First Version Received: May 2000/Final Version Received: May 2001

Rights and permissions

Reprints and permissions

About this article

Cite this article

Ash, J., Easaw, J., Heravi, S. et al. Are Hodrick-Prescott `forecasts' rational?. Empirical Economics 27, 631–643 (2002). https://doi.org/10.1007/s001810100107

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s001810100107

Search

Navigation