Page - 15 - in The Austrian Business Cycle in the European Context

15 business cycle is applied where the focus lies on developments in the level of time series, economies showing a strong trend growth will experience only few recessions. 3. 1.2 The deviation cycle definition As business cycles seem to be recurrent but not periodic, as Burns - Mitchell ( 1946) pointed out, Mintz ( 1969) suggested separating the trend from time series in order to study them properly. This was quite in line with Lucas' ( 1977) suggestion of defining the business cycle as the deviations of aggregate real output from trend, which puts the definition on a more theoretical basis. The Solow ( 1970) growth model, describing production as following a secular trend - mostly driven by technological progress - with demand- driven imbalances causing temporary departures (the business cycle) from it, serves here as the theoretical framework. This is probably the definition most people have in mind, when they talk about the business cycle. If the business cycle is defined as departure from a trend it is called the "deviation cycle" or "growth cycle" approach. As the term "growth" usually refers to growth rates or first order differences in logs - which represents a special method for de-trending time series and therefore a kind of deviation cycle approach- the term "deviation cycle" will always be used hencef orth27• The choice of the appropriate definition of business cycles - clas- sical or deviation cycle - may depend on the specific research topic. If the purpose is to give guidance for business cycle inter- vention (as deviations from the steady state growth path imply welfare losses) then the deviation cycle is more appropriate. This is based on the fact, that the business cycle defined by the devia- 27 Sometimes "deviation cycles" and "growth cycles" are used as synonyms; in this case, calculating first differences for extracting the trend is labelled the "growth rate cycle" approach in order to distinguish between them.