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- Title
Are Hodrick-Prescott `forecasts' rational?
- Authors
Ash, J. C. K.; Easaw, J. Z.; Heravi, S. M.; Smyth, D. J.
- 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.
- Subjects
UNITED States; PRICE inflation; RATIONAL expectations (Economic theory); ECONOMIC forecasting
- Publication
Empirical Economics, 2002, Vol 27, Issue 4, p631
- ISSN
0377-7332
- Publication type
Article
- DOI
10.1007/s001810100107