Multivariate Detrending Under Common Trend Restrictions: Implications For Business Cycle Research

Sharon Kozicki
July 1996
RWP 96-01
Research Division
Federal Reserve Bank of Kansas City

(Abstract  for 1996 paper available below.  Full Research Working Papers can be ordered at no charge.)

ABSTRACT

This paper outlines a methodology to detrend multiple time series under common trend restrictions. The same filters used to construct the estimated trend in univariate exercises are shown to be appropriate in multivariate studies with a single common trend. However, to estimate the common trend in the multivariate case, the filter is applied to a linear combination of series rather than to each series individually. An empirical example and simulation exercises illustrate the implications of common trend detrending for measurement of business cycle properties.

Keywords: Hodrick-Prescott filter, business cycle measurement, common trend.

JEL: E32, C32.

Sharon Kozicki is a senior economist at the Federal Reserve Bank of Kansas City. The views expressed herein are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. The author thanks Pu Shen and Todd Clark for discussions and comments. She also thanks Steve Monto for excellent research assistance. Internet: sharon.kozicki@kc.frb.org

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