02709cam a22002537 4500001000600000003000500006005001700011008004100028100002400069245012400093260006600217490004100283500001900324520155200343530006101895538007201956538003602028690009002064690011002154710004202264830007602306856003702382856003602419w7439NBER20160430230847.0160430s1999 mau||||fs|||| 000 0 eng d1 aRotemberg, Julio J.12aA Heuristic Method for Extracting Smooth Trends from Economic Time Seriesh[electronic resource] /cJulio J. Rotemberg. aCambridge, Mass.bNational Bureau of Economic Researchc1999.1 aNBER working paper seriesvno. w7439 aDecember 1999.3 aThis paper proposes a method for separating economic time series into a smooth component whose mean varies over time (the trend') and a stationary component (the cycle'). The aim is to make the trends as smooth as possible while also producing cycles with plausible properties. While the main justification for the method is intuitive, the method does a good job of separating these two components in some artificial examples where the constructed series are indeed the sum of smooth (possibly stochastic) functions of time and a low order autoregressive process. When the true trends consist of low order polynomials, the proposed method obtains trends that are of similar accuracy than fitted polynomial trends. In other cases, the MSE of the proposed trends is much lower. Similarly, except in quite special cases, the MSE of the proposed trend is considerably smaller than that obtained by the HP filter. VARs that involve the cyclical variables constructed by this method yield accurate representations of the behavior of the underlying cycles of several variables. By contrast, VARs with the series in differences give poor descriptions of the effect of cyclical shocks, even though Dickey-Fuller tests do not reject the hypotheses that the artificial series have unit roots. I apply the method to some well known aggregate time series. The results suggest that real wages in the U.S. are strongly positively correlated with military purchases and that the reduction in the growth of trend GDP in the U.S. started well before 1973. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE3 - Prices, Business Fluctuations, and Cycles2Journal of Economic Literature class. 7aC1 - Econometric and Statistical Methods and Methodology: General2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w7439.4 uhttp://www.nber.org/papers/w743941uhttp://dx.doi.org/10.3386/w7439