Seite - 3 - in The Austrian Business Cycle in the European Context

3 small open economy gets export impulses from different eco- nomic areas (e.g. the US and Europe) these can show up in differ- ent economic sectors and interfere with domestic, idiosyncratic cycles4 5• Confounding both cycles by aggregating the underlying time series to a higher total (like the GDP) could hamper a proper identification of the business cycle and therefore give rise to mis- leading conclusions about timing and size of fluctuations, and thereby to suboptimal or even wrong economic policy reactions. Observing business cycles at the sectoral level has the great ad- vantage that it sheds light on economic transmission mechanisms, whereas for stabilisation policy purposes its benefits are not so clear. This is based on the notion that the business cycle is mainly driven by fluctuations in demand that can be smoothed by inter- ventions targeting certain demand components6• Opposite to this, supply side measures are understood to aim at the trend compo- nent only. Therefore classical stabilisation policy i.e. fiscal and monetary policy intends to act on output via demand aggre- gates, but not on the long-run growth (trend) path. This view has somewhat changed today in that economic policy tries to gener- ate demand by directly targeting the long term growth path7• Ex- amples for this are investment premia, public spending for educa- tion or subsidies for research and development. Looking at sec- toral cycles, apart from giving an insight into transmission mecha- 4 An example can be the international business cycle interfering with a political one of the type mentioned by Nordhous ( 1975). 5 The idea of the existence of several independent driving forces has been taken up methodologically by the dynamic common component modelling approach, where several common cyclical factors represent the business cycle. 6 Prominent exceptions to this ore Real Business Cycle models, brought forward by Kydlond - Prescott ( 1982). Blanchard - Quoh ( 1989) criticise this as lumping to- gether supply and demand shocks whereas only the latter refer to what econo- mists usually regard as business cycles. For a good overview about the actual de- velopment and the future relevance of the Real Business Cycle theory see Rebelo (2005). 7 For the Austrian case see e.g. Aiginger (2005).