OECD Economics Department Working Papers
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- Forthcoming titles
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
Comparing Semi-Structural Methods to Estimate Unobserved Variables
The HPMV and Kalman Filters Approaches
Economists often seek to estimate unobserved variables, representing “equilibrium” or “expected” values of economic variables, as benchmarks against which observed, realised values of these variables may be evaluated. Such comparisons are often used as economic policy indicators, for example the output gap, as measured by the ratio of actual to potential GDP, is commonly used as a measure of excess demand in assessing inflation pressures. To estimate these unobserved variables, a popular approach is the so-called semi-structural approach which includes: the Hodrick Prescott multivariate filter (developed by Laxton and Tetlow, 1992) and the Kalman filter (see, among others Harvey, 1992 and Cuthberson et al., 1992). This paper shows that the two approaches are closely linked, and specifically, it explains how to reproduce theHodrick Prescott multivariate filter using the Kalman filter. Being able to do so has at least two possible advantages. First, while the traditional HPMV filter ...
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