The Hodrick-Prescott technique: A smoother versus a filter: An application to New Zealand GDP

It is shown that the Hodrick-Prescott filter acts as a ‘smootherʹ over the sample and as a true ‘filterʹ at the end of the sample. Using these two different concepts, the output gap resulting from the true filter is consistent with the policy makerʹs interpretation of the cyclical component of real output and provides better out-of-sample forecasts of inflation.