Classical and modern business cycle measurement: The European case

This paper intends to harmonize two different approaches employed in the analysis of business cycles and, in doing so, it retrieves the stylized facts of the business cycle in Europe. We start with the classical approach proposed in Burns and Mitchell (1946) of dating and analyzing the business cycle. The stylized facts retrieved are commented and compared to those obtained by Harding and Pagan (2002) for the U.S.. Two conclusions can be extracted from the results: a) though the turning points obtained for individual countries seem to cluster and would suggest the idea of a common cycle, there are relevant differences in the stylized facts characterizing the business cycle in the individual European economies under analysis; b) moreover, we find relevant differences in the business cycle stylized facts of the European countries and the U.S., mostly in terms of the duration, the amplitude of the cycle and the shape of the recovery. We then adopt the modern alternative: the Markov-switching vector autoregression (MS-VAR). The models regime probabilities provide an optimal statistical inference of the turning point of the European business cycle. For assessing the capacity of the parametric approach to generate the stylized facts of the classical cycle in Europe, the stylized facts of the original data are compared to those of simulated data. Contrary to the results reported by Harding and Pagan (2002) , we show that the MS-VAR model is a good candidate to be used as an statistical instrument to improve the understanding of the business cycle.JEL Classification: E32, F43, F47, C32We are grateful to Mike Artis, Mike Clements and Adrian Pagan for useful comments and discussions. Financial support from the UK Economic and Social Research Council under grant L116251015 is gratefully acknowledged by the first author. The research of the second author was supported through a European Community Marie Curie Fellowship, contract HPMF-CT-2000-00761. Corresponding author: Juan Toro