Page - 62 - in The Austrian Business Cycle in the European Context

62 If the cycle is defined in the classical way, as depicted by the trended bold line in the upper part of Figure 4, then point A repre- sents one of the upper turning points occurring at time t A as it con- stitutes a local minimum. Following the deviations approach and observing only turning points of the extracted business cycle com- ponent, point B marks the upper turning point at time ts. This point is derived by analysing only the stationary, bold line in the lower part of the figure, which should represent the business cycle ac- cording to the deviations approach. It can easily be seen - as it is a well-known fact - that the turning points according to the cycli- cal deviations approach (bold line in the lower part) lead the ones of the classical definition (bold line in the upper part)B5• If instead the focus of interest lies on growth rates (growth rate cy- cle approach), the result is again different turning points. The dot- ted line in the lower part of Figure 4 represents the growth rates of the series. When interpreting the business cycle as a sine function (like it is done here with the bold line in the lower part), growth rates follow a cosine function as this is its first derivative. This series of growth rates is illustrated by the dotted line in the lower part of Figure 4 (for graphical reasons it has been linearly transformed). It reaches its peaks earlier (e.g. at time tc) than the others86, which is in part due to its asymmetric construction. As for their importance, turning points have been given special names. In the classical approach, the lower turning points are called troughs, which are followed by a phase of recovery leading into a period of expansion whose end is marked by the upper turn- ing point, the peak. Thereafter, a contraction takes place followed 85 The length of the lead is related positively to trend growth and negatively to the amplitude of the series. The higher trend growth, the more it is capable of delaying the downward-sloping effect of the cycle on the whole series. 86 If a high frequency error term is included, the leading property of growth rates cannot be exploited for an earlier indication of turning points. This is especially true as it has been shown that taking first-order differences superimpose high frequency error terms.