Page - 16 - in The Austrian Business Cycle in the European Context

16 tion concept shows a lead in time vis-a-vis the one interpreted in the classical way. Furthermore, it has to be kept in mind that ap- plying the classical approach yields fewer and shorter contraction phases than the deviation method as documented in Harding - Pagan (2002). This may lead to a substantially different business cycle stabilisation policy. Especially the lead property makes de- viation cycle approaches more appropriate for economic policy issues. For all those reasons, the following analysis concentrates exclusively on the deviation cycle approach. 3.2 Isolation of business cycle frequencies Following Zarnowitz ( 1992), economic time series measuring output may be represented in the following form2a (1) Y, = X, +C, +S, +e, where x, represents the trend component, c, the business cycle variation and s, other components like seasonal, working day or weather effects. e, represents an error term capturing all residuals like special events and measurement errors. In earlier approaches, all components have been modelled as being deterministic, whereas modern ones understand all or some of them as stochas- tic processes29. 28 Frequently this model is specified in logarithms where the underlying model is multiplicative r, = X, • c, • s, • e, . 29 Examples for this kind of models are structural time series models following the approach of Harvey ( 1989) where the trend is modelled as a stochastic process. Also the method of using just growth rates (out of first order differencing process) which implies random walk behaviour of the trend component can be regarded as a stochastic approach.