The Review of Austrian Economics

, Volume 26, Issue 4, pp 433–461

The empirical relevance of the Mises-Hayek theory of the trade cycle

Article

DOI: 10.1007/s11138-013-0225-9

Cite this article as:
Lester, R.B. & Wolff, J.S. Rev Austrian Econ (2013) 26: 433. doi:10.1007/s11138-013-0225-9

Abstract

Austrian Business Cycle Theory (ABCT), as espoused by Mises (1912, 1949) and Hayek (1935), predicts changes in the economy’s structure of production following an unexpected change in monetary policy. In particular, following a credit expansion the theory predicts that: previously idle resources are drawn into the market, previously employed resources are used more intensively, and prices and quantities of goods in the intermediate stages of production decline relative to the prices and quantities of goods in other stages. To test the theory’s implications we employ stage of process data which classify goods by their distance to final consumption. Using this data we run structural vector autoregressions and isolate each variable’s response to a monetary shock. Consistent with the theory, we find that resource use expands on the intensive and extensive margin. On the other hand, we find little evidence of the relative price and quantity effects predicted by ABCT. Since the relative price effects are the distinguishing aspect of ABCT, we conclude that evidence in favor of the theory is, at best, mixed.

JEL Classifications

E32 E52 E53 

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of Notre DameNotre DameUS
  2. 2.Department of EconomicsUniversity of Notre DameNotre DameUS

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