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Abstract

The main goal of this paper is to propose the probabilistic description of cyclical (business) fluctuations. We generalize a fixed deterministic cycle model by incorporating the time-varying amplitude. More specifically, we assume that the mean function of cyclical fluctuations depends on unknown frequencies (related to the lengths of the cyclical fluctuations) in a similar way to the almost periodic mean function in a fixed deterministic cycle, while the assumption concerning constant amplitude is relaxed. We assume that the amplitude associated with a given frequency is time-varying and is a spline function. Finally, using a Bayesian approach and under standard prior assumptions, we obtain the explicit marginal posterior distribution for the vector of frequency parameters. In our empirical analysis, we consider the monthly industrial production in most European countries. Based on the highest marginal data density value, we choose the best model to describe the considered growth cycle. In most cases, data support the model with a time-varying amplitude. In addition, the expectation of the posterior distribution of the deterministic cycle for the considered growth cycles has similar dynamics to cycles extracted by standard bandpass filtration methods.

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Authors and Affiliations

Łukasz Lenart

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