Page - 42 - in The Austrian Business Cycle in the European Context

42 4.1 Construction of composite economic indices 4. 1. 1 The empirical NBER approach In order to isolate and date the business cycle Burns - Mitchell ( 1946) constructed lagging, leading and coincident composite indices out of a large amount of monthly economic time series64• The reason for considering several economic time series was partly the lack of a series covering aggregated output on a sub-annual frequency (like quarterly GDP), and partly the fact that noisy components are reduced through aggregation. The following illustrates only the basic steps of the empirical NBER approach in order to give an impression of its properties. Good descriptions of the details are provided by Zarnowitz ( 1992) and Bry - Boschan ( 1971), to which the reader is referred. After a possibly necessary adjustment of all time series for seasonal variations, turning points of them have to be calculated (usually based on the method proposed by Bry -Boschan (1971) which will be explained in chapter 6.2). Following this, a reference chronol- ogy for determining the leads and lags of each time series based on these turning points has to be set up. This has been done origi- nally by clustering them into groups of leading, lagging and coin- cident ones on a judgmental basis. Furthermore, synthetic up/down turning point indices (indicating the percentage of time series which show a peak or trough at a certain point in time) or diffusion indices (indicating the percentage of time series in ex- pansion at a certain point in time) are developed. Taking GDP or industrial production as the reference chronology may serve the 64 This method was developed historically at the NBER and still forms the basis of this kind of analysis, carried out by the Conference Board for the US economy or the OECD. Since then, several improvements have been made with every institution having its own special version. The present study only draws on the NBER basic ver- sion and the reader is kindly referred to the special literature for variations.