Hodric Prescott

[Tinoosh]

I have got my GDP sereis non-stationary and with a positive trend, I want to have this series on the right side of my Taylor Rule model where inflation rate and exchange rate are the other variables and the interest rate is on the left side of the model.

should I apply Hodric Prescott to de-trend my GDP series? and if yes, so is there any need to make first differences to make it also stationary?

which is better to do? Hodric Prescott filter, or just first differences and make the series stationary? or both??

Thank you for your help

Cheers
Tinoosh

[eca05jpm]

It is better to use a filter (it better captures movements in potential output) - but be aware that it is much less reliable at the end of the sample.