Hodrick-Prescott (HP) Filter: Why You Should Not Use It

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Will Kenton
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Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
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Updated June 24, 2021
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David Kindness
David Kindness
Reviewed by David Kindness
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David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.
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Hodrick-Prescott (HP) Filter

Investopedia / Theresa Chiechi

What Is the Hodrick-Prescott (HP) Filter?

The Hodrick-Prescott (HP) filter refers to a data-smoothing technique. The HP filter is commonly applied during analysis to remove short-term fluctuations associated with the business cycle. Removal of these short-term fluctuations reveals long-term trends. This can help with economic or other forecasting associated with the business cycle.

Key Takeaways

  • The Hodrick-Prescott filter refers to a data-smoothing technique used primarily in macroeconomics.
  • It is commonly applied during analysis to remove short-term fluctuations associated with the business cycle.
  • In practice, it is used to smooth and detrend the Conference Board's Help Wanted Index so it can be benchmarked against the Bureau of Labor Statistic's JOLTS, which measures job vacancies in the U.S.

Understanding the Hodrick-Prescott (HP) Filter

The Hodrick-Prescott (HP) filter is a tool commonly used in macroeconomics. It is named after economists Robert Hodrick and Edward Prescott who first popularized this filter in economics in the 1990s. Hodrick was an economist who specialized in international finance. Prescott won the Nobel Memorial Prize, sharing it with another economist for their research in macroeconomics.

This filter determines the long-term trend of a time series by discounting the importance of short-term price fluctuations. In practice, the filter is used to smooth and detrend the Conference Board's Help Wanted Index (HWI) so it can be benchmarked against the Bureau of Labor Statistic's (BLS) JOLTS, an economic data series that may more accurately measure job vacancies in the U.S.

The HP filter is a tool commonly used in macroeconomics.

Special Considerations

The HP filter is one of the most widely used tools in macroeconomic analysis. It tends to have favorable results if the noise is distributed normally, and when the analysis being conducted is historical.

According to a paper published by economist and professor James Hamilton—which appears on the National Bureau of Economic Research website—there are several reasons why the HP filter should not be used. Hamilton first proposes that the filer produces outcomes that have no basis in the process of generating data. He also states that the values that are filtered at the sample's end are totally different from those in the middle.

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