Dissecting the cycle: a methodological investigation

Abstract

Following Burns and Mitchell we define the cycle as a pattern in the level of aggregate economic activity. An algorithm to locate turning points is developed, as is a new measure of pro-cyclicality. A link between turning points and the moments of the series is established thereby providing the statistical foundation that Burns and Mitchell's work lacked. Using these tools we are able to dissect cycles in terms of the contributions made by trend growth, volatility, serial correlation and non-linear effects. We dissect several models and find little evidence that certain non-linear effects are important to the nature of business cycles.