Seite - 37 - in The Austrian Business Cycle in the European Context

37 usual assumption of orthogonality of trend and cycle. But it does not necessarily represent a deficiency, as it seems plausible some- times to see both components influenced by one shock. Admit- tedly, this means - as criticised by Blanchard - Quah (1989} - lumping together supply side shocks, which affect the secular component, and demand-related shocks influencing the cycle. As the Beveridge-Nelson approach is based on ARIMA time series models, all problems linked to that sort of modelling are carried over to this trend-cycle separation approach. Foremost, applying this kind of modelling the problem is usually not to find a suitable model but to discriminate between the large amounts of feasible ones61 • The identification of the cycle therefore remains a some- what arbitrary task and may be challenged in academic discus- sions. Furthermore, ARIMA models became prominent on account of their good short-run forecasting properties, whereas they per- form quite poorly for longer-term projections. As a consequence, one can extract quite different trends and cyclical components from a plethora of suitable models. 3.2.4.8 Unobserved components models This type of approach intends to model all components explicitly. A special time series structure is modelled for the trend, the cycle, some regression effects like working days, (possibly the season) and even innovations like structural breaks or suspected outliers62• This method is thus very flexible and a wide variety of specifica- tions is possible. Usually the trend is modelled as some kind of ran- dom walk process, possibly allowing for a drift. A prominent repre- sentative of this approach is Harvey (1989}, who proposed a so- 61 Christiano - Eichenbaum ( 1992) mentioned this problem for practical business cycle analysis. 62 For instance, CaNa/ho - HaNey (2004) estimated a model for the euro area with a trend evolving stochastically in its slope and level with adding a serially corre- lated stationary component representing the cycle.