Business cycles: real facts or fallacies? ∗ Gunnar Bårdsen Norwegian School of Economics Paul G. Fisher Bank of England Ragnar Nymoen University of Oslo and Central Bank of Norway 29 January 1997 Abstract We contrast two alternative approaches to the analysis of price behaviour over the business cycle: the “stylized facts” methodology and econometric models. Using the “stylized facts” apparatus on United Kingdom and Norwe- gian data, we find that the relationships between wages and unemployment, are unstable over even short sample periods. We design two small wage—price models for the United Kingdom and Norway that appear constant, inter- pretable, data coherent and that can account for the instabilities of the “styl- ized facts” correlations. Simulation is used to show that even when underlying behaviour is constant, we can expect to observe quite different correlations of macroeconomic variables over the business cycle, hence we encompass the result of the “stylized facts” analysis. ∗ Paper presented at the Symposium at the Centennial of Ragnar Frisch March 3-5,1995 Oslo. We would like to thank Sigbjørn A. Berg, Clive W. J. Granger, Kåre Johansen, Tor J. Klette, Bjørn Naug, Torsten Persson and Paul Søderlind for helpful comments, and participants at seminars given at University of Stockholm,University of Trondheim, Norwegian School of Economics and Business Administration, Bank of England, Central Bank of Norway, Norwegian School of Management and the 8th Nordic Symposium on Multivariate Cointegration Analysis. We would also like to thank an anonymous referee for detailed and helpful comments. The views expressed are those of the authors and should not be interpreted as reflecting those of the Bank of England or the Central Bank of Norway. The research was partly financed by SNF-project 2550.