Page - 13 - in The Austrian Business Cycle in the European Context

13 3. Methods of extracting business cycle characteristics Before one can study the business cycle, the latter has to be ex- tracted from the underlying time series. For that purpose, at least a vague idea of the nature of the business cycle is necessary. 3.1 Defining the business cycle From studying the literature it becomes apparent, that there is no consensus about the nature and definition of the business cycle. This lack of a precise definition results first of all from the absence of a widely accepted theory of the business cycle phenomenon. The most prominent approaches relate to demand-side imbal- ances caused by information asymmetries between economic agents or to supply-side shocks due to technical progress (real business cycle theories}. These problems make theory a poor guide for measuring business cycles. Secondly, the empirical ap- proach for discriminating between competing theories is prob- lematic, too. Looking at the behaviour of economic time series, one can see smooth up and down changes (especially if one imagines some kind of simple trend} without any regularities con- cerning the length or amplitude of a cycle. As a consequence, there exists a plethora of statistical tools and methods for extract- ing this kind of movements. 3. 1. 1 The classical business cycle definition Despite a long tradition in business cycle analysis, starting from the middle of the last century by Burns -Mitchell (1946), their definition still forms the basis of one strand of business cycle studies: "Business cycles are a type of fluctuations found in the aggregate economic activity of nations that organise their work mainly in business enterprises: a cycle consists of expansions occurring at