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Empirical Economics

, Volume 27, Issue 4, pp 631–643 | Cite as

Are Hodrick-Prescott `forecasts' rational?

  • J. C. K. Ash
  • J. Z. Easaw
  • S. M. Heravi
  • D. J. Smyth

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.

Key words: Hodrick-Prescott filter; Rational expectations; Proxy forecasts; Inflation. 
JEL classifications: C53; E37. 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2002

Authors and Affiliations

  • J. C. K. Ash
    • 1
  • J. Z. Easaw
    • 2
  • S. M. Heravi
    • 3
  • D. J. Smyth
    • 4
  1. 1.Department of Economics, University of Reading, PO Box 218, Whiteknights, Reading, Berks, RG6 6AA, England.GB
  2. 2.Department of Economics, University of Bath, Claverton Down, Bath, BA2 7AY, EnglandGB
  3. 3.Cardiff Business School, University of Wales, Aberconway Building, Colum Drive, Cardiff, CF1 3EU.GB
  4. 4.Economics Group, Middlesex University Business School, The Burroughs, Hendon, London NW4 4BT, England.GB

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