Introduction to MacroFilters

The outlier problem

Classical filters minimise squared loss. A single catastrophic quarter — a financial crash, a pandemic lockdown, a war — is indistinguishable from a structural break in the trend. The result is a trend that dips sharply during the shock and never fully recovers, contaminating every subsequent business-cycle estimate.

MacroFilters solves this with the mbh_filter() function, which uses Huber loss to automatically down-weight extreme observations while fitting a smooth trend via gradient boosting.

Example: same filter, two input formats

set.seed(7)
y_raw <- cumsum(rnorm(60)) + (1:60) * 0.3   # a simple integrated series

# As plain numeric
hp_num <- hp_filter(y_raw)
#> Warning: Cannot determine series frequency; assuming quarterly (freq = 4). Pass
#> `lambda` or `freq` explicitly to silence this warning.
class(hp_num$trend)   # numeric
#> [1] "numeric"

# As a monthly ts object
y_ts   <- ts(y_raw, start = c(2019, 1), frequency = 12)
hp_ts  <- hp_filter(y_ts)
class(hp_ts$trend)    # ts — output matches input
#> [1] "numeric"

The filters normalise the input internally, perform all computations on a plain numeric vector, then restore the original class and index before returning.

3.1 hp_filter() — Sparse Hodrick-Prescott

The Hodrick-Prescott (1997) filter is the workhorse of macroeconomic trend extraction. It solves the penalised least-squares problem:

\[ \min_{\tau} \sum_{t=1}^{n}(y_t - \tau_t)^2 + \lambda \sum_{t=2}^{n-1}[(\tau_{t+1} - \tau_t) - (\tau_t - \tau_{t-1})]^2 \]

The second term penalises curvature in the trend; \(\lambda\) controls the smoothness.

Most implementations solve this by inverting a dense \(n \times n\) matrix, which is \(O(n^3)\). MacroFilters recognises that the penalty matrix \(D'D\) is pentadiagonal (a sparse banded structure) and solves the system using Matrix::bandSparse() and sparse Cholesky factorisation — bringing the cost down to O(n) in time and memory.

set.seed(42)
n  <- 100
y  <- ts(100 + 0.4 * (1:n) + 5 * sin(2 * pi * (1:n) / 20) + rnorm(n, sd = 2),
         start = c(2000, 1), frequency = 4)

hp <- hp_filter(y)
hp
#> -- MacroFilter [HP] --
#>    Observations : 100
#>    Parameters   : lambda = 1600
#>    Cycle range  : [-7.738, 9.143]  sd = 3.897
#>    Compute time : 0.002 s

The smoothing parameter \(\lambda\) is auto-selected from the series frequency via the Ravn-Uhlig (2002) heuristic:

\[ \lambda = 6.25 \times \text{freq}^4 \]

which gives \(\lambda = 1{,}600\) for quarterly and \(\lambda = 129{,}600\) for monthly data — the conventional values. You can override it explicitly: hp_filter(y, lambda = 1600).

3.2 hamilton_filter() — Regression-Based Alternative

Hamilton (2018) proposes replacing the HP filter entirely with an OLS regression. The idea: project \(y_{t+h}\) on a constant and \(p\) lags of \(y_t\):

\[ y_{t+h} = \alpha_0 + \alpha_1 y_t + \alpha_2 y_{t-1} + \cdots + \alpha_p y_{t-p+1} + c_t \]

The fitted values form the trend; the residuals form the cycle. The horizon \(h\) is set to two years ahead by default (e.g., \(h = 8\) quarters), long enough to capture business-cycle variation without filtering it out.

Advantages over HP: - No end-point distortion - No spurious cycles from integrated series - Produces stationary cycle estimates by construction

ham <- hamilton_filter(y)      # auto-detects h = 8 for quarterly
ham
#> -- MacroFilter [Hamilton] --
#>    Observations : 100
#>    Parameters   : h = 8, p = 4
#>    Cycle range  : [-13.41, 11.8]  sd = 7.212
#>    Compute time : 0.001 s

Note that the first \(h + p - 1\) observations of the trend and cycle are NA, because there is insufficient history for the regression.

3.3 bhp_filter() — Boosted HP

Phillips & Shi (2021) propose iteratively applying the HP filter: at each step, the filter is re-run on the residuals from the previous pass, and the resulting increment is added to the trend estimate. This procedure converges to a trend that better tracks stochastic variation.

\[ \tau^{(m)} = \tau^{(m-1)} + S_\lambda \cdot c^{(m-1)}, \qquad c^{(m)} = y - \tau^{(m)} \]

where \(S_\lambda\) is the HP smoothing operator. Three stopping rules are available:

bhp <- bhp_filter(y, stopping = "bic")
bhp
#> -- MacroFilter [bHP] --
#>    Observations : 100
#>    Parameters   : lambda = 1600, iterations = 47, stopping_rule = bic
#>    Cycle range  : [-5.487, 4.068]  sd = 1.857
#>    Compute time : 0.001 s

Internally, MacroFilters precomputes the sparse penalty matrix \(Q = (I + \lambda D'D)^{-1}\) once and reuses it across all iterations, so the cost per iteration is a single sparse matrix–vector multiply rather than a full solve.

The Problem with Squared Loss

Every filter above minimises squared residuals. When a pandemic shock drops GDP by 15% in a single quarter, that one observation exerts enormous leverage — it is 100× more influential than a typical quarterly fluctuation. The filter accommodates it by bending the trend downward, producing a spurious trend break that infects every subsequent output gap estimate.

The MBH Solution: Huber Loss + Boosting

The MacroBoost Hybrid (MBH) filter replaces squared loss with Huber loss:

\[ L_\delta(r) = \begin{cases} \dfrac{r^2}{2} & |r| \leq \delta \\[6pt] \delta\!\left(|r| - \dfrac{\delta}{2}\right) & |r| > \delta \end{cases} \]

Observations with residuals smaller than \(\delta\) are treated like ordinary squared-error observations. Observations with residuals larger than \(\delta\) — the structural shocks — contribute only linearly, massively reducing their influence on the trend estimate.

Additive Model

The trend is decomposed into two additive base learners fitted via component-wise L2-boosting (mboost):

\[ \hat{\tau}_t = \underbrace{b_0 + b_1 \cdot t}_{\text{Global linear drift}} + \underbrace{f(t)}_{\text{Local curvature (P-spline)}} \]

• bols(time, intercept = TRUE) — captures the global linear drift.
• bbs(time, knots, degree = 3, differences = 2, boundary.knots) — a cubic P-spline with knots interior knots that captures smooth nonlinear curvature.

The default knots = min(max(20, floor(n/2)), 250) is deliberately generous — it gives the spline enough flexibility to follow genuine low-frequency movements without overfitting, while the Huber loss ensures that shock-contaminated quarters are downweighted. The cap of 250 keeps the basis bounded on long / high-frequency series, where extra knots add cost but not flexibility (the penalty, not the knot count, governs smoothness).

Parameters

By default, d is auto-calibrated as the MAD of the HP cyclical residual, anchoring the Huber threshold to the output-gap (business-cycle) scale rather than the growth-rate scale. You can override it with an explicit numeric value: d = 0.01 is typical for growth rates, while larger values suit index-level series.

For real-time applications where the sample grows one period at a time, set boundary.knots = c(1, T_max) to anchor the B-spline domain to the full-sample range — this prevents the basis from shifting between vintages and makes trends comparable across publication dates.

Quick example

France and Spain had two of the sharpest COVID-19 contractions in the EU (approximately −14 % and −18 % quarter-on-quarter in 2020 Q2 respectively), both followed by a rapid V-shaped recovery — making them a demanding real-world stress test for any trend filter.

# FRED public endpoint — no API key needed.
# See data-raw/intl_gdp.R for the full reproducible download script.
read_fred <- function(id) {
  url <- sprintf("https://fred.stlouisfed.org/graph/fredgraph.csv?id=%s", id)
  dt  <- read.csv(url, col.names = c("date", "gdp_real"), na.strings = ".")
  dt$date    <- as.Date(dt$date)
  dt$gdp_log <- log(as.numeric(dt$gdp_real))
  dt[!is.na(dt$gdp_real), ]
}
fr_raw <- read_fred("CLVMNACSCAB1GQFR")
es_raw <- read_fred("CLVMNACSCAB1GQES")

# Apply HP + MBH per country.
# For log-level series, auto d (MAD of diff) is too tight — calibrate d on the
# cycle scale instead (see vignette "Hyperparameter Tuning for the MBH Filter").
make_trend_df <- function(raw, country) {
  dt  <- raw[raw$date >= as.Date("2000-01-01"), ]
  g   <- ts(dt$gdp_log, start = c(2000, 1), frequency = 4)
  hp  <- hp_filter(g)
  mbh <- mbh_filter(g, d = mad(hp$cycle))
  data.frame(country  = country,
             t        = as.numeric(time(g)),
             observed = as.numeric(g),
             hp       = as.numeric(hp$trend),
             mbh      = as.numeric(mbh$trend))
}

df_plot <- rbind(
  make_trend_df(fr_gdp, "France"),
  make_trend_df(es_gdp, "Spain")
)

# Keep Spain filter objects for the S3 class examples in Section 5
dt_es   <- es_gdp[es_gdp$date >= as.Date("2000-01-01"), ]
gdp     <- ts(dt_es$gdp_log, start = c(2000, 1), frequency = 4)
hp_res  <- hp_filter(gdp)
mbh_res <- mbh_filter(gdp, d = mad(hp_res$cycle))

mbh_res
#> -- MacroFilter [MBH] --
#>    Observations : 105
#>    Parameters   : knots = 52, d = 0.01463, mstop = 500, mstop_initial = 500, nu = 0.1, df = 4, select_mstop = FALSE
#>    Cycle range  : [-0.2231, 0.03137]  sd = 0.02963
#>    Compute time : 0.047 s

Printing

mbh_res
#> -- MacroFilter [MBH] --
#>    Observations : 105
#>    Parameters   : knots = 52, d = 0.01463, mstop = 500, mstop_initial = 500, nu = 0.1, df = 4, select_mstop = FALSE
#>    Cycle range  : [-0.2231, 0.03137]  sd = 0.02963
#>    Compute time : 0.047 s

The print method shows the method, the number of observations, the key parameters, the cycle range, and how long the filter took to run.

Accessing components

# Trend and cycle as plain vectors
head(mbh_res$trend, 8)
#> [1] 12.28386 12.29250 12.30114 12.30977 12.31839 12.32701 12.33562 12.34422
head(mbh_res$cycle, 8)
#> [1] -0.002260454  0.001660910  0.003172859  0.005189628  0.006669714
#> [6]  0.005797033  0.006754803  0.004490809

# Verify the fundamental identity: trend + cycle == data
max(abs((mbh_res$trend + mbh_res$cycle) - mbh_res$data))  # should be < 1e-9
#> [1] 0

Inspecting metadata

str(mbh_res$meta)
#> List of 13
#>  $ method        : chr "MBH"
#>  $ knots         : int 52
#>  $ d             : num 0.0146
#>  $ mstop         : int 500
#>  $ mstop_initial : int 500
#>  $ nu            : num 0.1
#>  $ df            : int 4
#>  $ select_mstop  : logi FALSE
#>  $ boundary.knots: NULL
#>  $ compute_time  : num 0.047
#>  $ ts_class      : chr "ts"
#>  $ tsp           : num [1:3] 2000 2026 4
#>  $ idx           : NULL

The meta list stores every parameter used by the filter, making results fully reproducible from the object alone — no need to track arguments separately.

Plotting cycles side by side

df_cycle <- data.frame(
  t          = as.numeric(time(gdp)),
  HP_cycle   = as.numeric(hp_res$cycle),
  MBH_cycle  = as.numeric(mbh_res$cycle)
)

ggplot(df_cycle, aes(x = t)) +
  geom_hline(yintercept = 0, linetype = "dashed", colour = "grey40") +
  geom_line(aes(y = HP_cycle,  colour = "HP cycle"),  linewidth = 0.8) +
  geom_line(aes(y = MBH_cycle, colour = "MBH cycle"), linewidth = 0.8) +
  annotate("rect",
           xmin = 2020.00, xmax = 2020.75,
           ymin = -Inf, ymax = Inf,
           alpha = 0.12, fill = "firebrick") +
  scale_colour_manual(values = c("HP cycle" = "#0072B2", "MBH cycle" = "#E69F00")) +
  labs(
    title    = "Cyclical Components",
    subtitle = "HP cycle absorbs the shock; MBH cycle faithfully records it",
    x = "Year", y = "Cycle", colour = NULL
  ) +
  theme_minimal(base_size = 12) +
  theme(legend.position = "bottom")

In the MBH cycle, the COVID quarters appear as large negative spikes — the filter correctly recognises them as transitory deviations rather than a change in the long-run level. The HP cycle, by contrast, spreads the shock over several surrounding quarters as it tries to reconcile the trend distortion.