Page - 17 - in The Austrian Business Cycle in the European Context

17 Even the assumption of orthogonality of trend and cycle has been relaxed by some studies30, which is in line with Zarnowitz' ( 1992) consideration that trend and cycle are possibly influencing each other. As theory specifies neither the trend nor the business cycle pre- cisely, there is a large dissent in business cycle research, how the business cycle can be extracted from the underlying time series. As a consequence, several methods for isolating the cyclical component have been proposed. Based on the component structure given in Figure 1, business cy- cle extraction methods can be classified mainly by three none mutually exclusive characteristics • direct or indirect • univariate or multivariate • model-based or heuristic (filter) techniques Direct approaches try to extract directly only cyclical variations (according to a specified definition) out of one or more time se- ries, without prior adjustment of other components like trend, sea- sonality or noise. This class comprises univariate filter techniques like band-pass filters as well as models assuming a special structure for all components31• The latter can be constructed in a multi- or univariate manner. Indirect approaches by contrast, first try to single out other infor- mation not belonging to the business cycle in order to obtain the business cycle as the residual. As the data used here are already cleared for seasonal and working day effects, this is mainly a task of separating a trend from the series, eventually followed by some 30 Dellos (2003) estimated a business cycle model where trend and cycle interact in a non-trivial way. 31 See Harvey ( 1989).