All question below:

A famous economist wrote the following in 2012 about the H-P filter: "...some

people including Fed officials are using this kind of filter [an HP filter] to

argue that the US economy is already operating near potential, so that there is no

reason to pursue expansionary monetary and fiscal policy." The same economist

then goes on to argue that the problem with the HP filter, when applied to real

GDP data (see the plot below, the series are in millions of $, right hand scale), is

that, in the face of a large negative shock (like the financial crisis of 2008-9), the

HP filter assumes that potential output declines.

(a) Assess the validity of the economist's opinion using arguments developed in

class about the implications of filtering the data for business cycle analysis.

(b) What might you have done differently when attempting to model the cyclical

portion of US real GDP? Provide a clear and detailed explanation based on the

material covered in class.