The Review of Austrian Economics

, Volume 21, Issue 4, pp 283–300

Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices

Article

Abstract

Austrian business cycle theory has become an important point of focus in controversial mainstream discussions regarding the role of asset prices in monetary policy. In this article, the relation between asset prices and the Austrian business cycle theory is examined. The analysis focuses on how central banking supports optimism, resulting in the redirection of entrepreneurial activity and knowledge via asset price bubbles. The crucial role of credit expansion for asset price booms is also analyzed. Following this analysis, the implications for monetary policy are deduced.

Keywords

Austrian business cycle theory Asset prices Asset price bubbles Monetary policy Credit expansion Herding behavior 

JEL codes

B53 — Austrian Economics E32 — Business Cycles E44 — Financial Markets and the Macroeconomy E58 — Central Banks and their Policies 

References

  1. Ahmed, E., Koppl, R., Rosser Jr., J. B., & White, M. V. (1997). Complex bubble persistence in closed-end country funds. Journal of Economic Behavior and Organization, 32(1), 19–37.CrossRefGoogle Scholar
  2. Anderson, B. M. (1979). Economics and the public welfare. A financial and economic history of the United States, 1914–46. 2nd edition. Indianapolis, IN: Liberty Press.Google Scholar
  3. Bernanke, B., & Gertler, M. (2000). Monetary policy and asset price volatility. NBER Working Paper, No. 7559, February.Google Scholar
  4. Block, W. (1988). Fractional reserve banking. In W. Block, & L. Rockwell (Eds.), Man, economy and liberty: essays in honor of Murray N. Rothbard (pp. 24–21). Auburn: The Ludwig von Mises Institute.Google Scholar
  5. Bordo, M., & Jeanne, O. (2002). Monetary policy and asset prices: does “Benign Neglect” make sense? Paper presented at the conference: “Stabilizing the Economy: Why and How?” on July 11.Google Scholar
  6. Bordo, M., & Wheelock, D. (2004). Monetary policy and asset prices: a look back at past U.S. stock market booms. Federal Reserve Bank of St. Louis Review, November/December, 86 (6), 19–44, http://research.stlouisfed.org/publications/review/04/11/BordoWheelock.pdf
  7. Borio, C., & Lowe, Ph. (2002). Asset prices, financial and monetary stability: exploring the nexus. BIS Working Papers, No. 114, July.Google Scholar
  8. Butos, W. (1993). The recession and Austrian business cycle theory. Critical Review, 7(2–3), 277–306.Google Scholar
  9. Butos, W., & Koppl, R. (1993). Hayekian expectations: theory and empirical applications. Constitutional Political Economy, 4(3), 303–329.CrossRefGoogle Scholar
  10. Callahan, G., & Garrison, R. (2003). Does Austrian business cycle theory help explain the dot-com boom and bust. Quarterly Journal of Austrian Economics, 6(2), 67–98.CrossRefGoogle Scholar
  11. Carrilli, A., & Dempster, G. (2001). Expectations in Austrian business cycle theory: an application of the prisoner’s dilemma. Review of Austrian Economics, 14(4), 319–330.CrossRefGoogle Scholar
  12. Cecchetti, St. G., Genberg, H., Lipsky, J., & Sushil, W. (2000). Asset prices and central bank policy. London: International Centre for Monetary and Banking Studies.Google Scholar
  13. Conrad, Ch., & Stahl, M. (2002). Asset-reise als geldpolitische Zielgröße—das Beispiel der USA. Wirtschaftsdienst, 82, 486–493.Google Scholar
  14. Garrison, R. (2001). Time and money: the macroeconomics of capital structure. London: Routledge.Google Scholar
  15. Goodhart, C., & Hofmann, B. (2004). Deflation, credit and asset prices. In R. Burdekin, & P. Siklos (Eds.), Deflation (pp. 166–188). Cambridge: Cambridge University Press.Google Scholar
  16. Greenspan, A. (2002). Opening remarks. rethinking stabilization policy. Federal Reserve Bank of Kansas City, 1–10.Google Scholar
  17. Gruen, D., Plumb, M., & Stone, A. (2003). How should monetary policy respond to asset-price bubbles? ECB Research Discussion Paper, November.Google Scholar
  18. Horwitz, St. (1992). Monetary evolution, free banking, & economic order. Boulder: Westview.Google Scholar
  19. Horwitz, St. (2000). Microfoundations and macroeconomics: an Austrian perspectives. New York: Routledge.Google Scholar
  20. Horwitz, St. (2003). The costs of inflations revisited. The Review of Austrian Economics, 16(1), 77–95.CrossRefGoogle Scholar
  21. Huerta de Soto, J. (2003). Nota critica sobre la propuesta de reforma de las normas de contabilidad. Actuarios, No. 21, April/May 2003.Google Scholar
  22. Huerta de Soto, J. (2006). Dinero, Crédito Bancario Y Ciclos Económicos. 3rd Revised Edition. Madrid: Unión Editorial.Google Scholar
  23. Hughes, A. M. (1997). The recession of 1990: an Austrian explanation. Review of Austrian Economics, 10(1), 107–123.CrossRefGoogle Scholar
  24. Hülsmann, J.-G. (1998). Toward a general theory of error cycles. Quarterly Journal of Austrian Economics, 1(4), 1–23.CrossRefGoogle Scholar
  25. Ikeda, St. (1997). Dynamics of the mixed economy: toward a theory of interventionism. London: Routledge.Google Scholar
  26. Keeler, J. P. (2001). Empirical evidence on the Austrian business cycle theory. Review of Austrian Economics, 14(4), 331–351.CrossRefGoogle Scholar
  27. Koppl, R. (2002). Big players and the economic theory of expectations. New York: Palgrave Macmillan.Google Scholar
  28. Koppl, R., & Mramor, D. (2003). Big players in Slovenia. Review of Austrian Economics, 16(2/3), 253–269.CrossRefGoogle Scholar
  29. Koppl, R., & Sarjanovic, I. (2003). Big players in the ‘New Economy’. In J. Birner (Ed.), Austrian perspectives on the New Economy. London: Routledge.Google Scholar
  30. Koppl, R., & Yeager, L. B. (1996). Big players and herding in asset markets: the case of the Russian ruble. Explorations in Economic History, 33(3), 367–383.CrossRefGoogle Scholar
  31. Laidler, D. (2003). The price level, relative prices and economic stability: aspects of the interwar debate. BIS Working Papers, No. 136, September.Google Scholar
  32. le Roux, P., & Levin, M. (1998). The capital structure and the business cycle: some tests of the validity of the Austrian business cycle in South Africa. Journal for Studies in Economics and Econometrics, 22(3), 91–109.Google Scholar
  33. Leijonhufvud, A. (1981). The costs and consequences of inflation. In information and coordination. New York: Oxford University Press.Google Scholar
  34. Levin, P. (1999). Capital in disequilibrium: the role of capital in a changing world. London: Routledge.Google Scholar
  35. Machlup, F. (2002 [1931]). Börsenkredit, Industriekredit und Kapitalbildung. Reprint of the First Edition. Frankfurt: Frankfurter Allgemeine Buchverlag.Google Scholar
  36. Mueller, A. (2001). Financial cycles, business activity, and the stock market. Quarterly Journal of Austrian Economics, 4(1), 3–21.CrossRefGoogle Scholar
  37. Rothbard, M. N. (1991). The case for the 100 percent gold standard (2nd ed.). Auburn: Ludwig von Mises Institute.Google Scholar
  38. Rothbard, M. N. (2000). America’s great depression (5th ed.). Auburn: Ludwig von Mises Institute.Google Scholar
  39. Rothbard, M. N. (2001[1962]). Man, economy and state. Auburn: Ludwig von Mises Institute.Google Scholar
  40. Scharfstein, D., & Stein, J. (1990). Herd behavior and investment. American Economic Review, 80(3), 465–479.Google Scholar
  41. Schnabl, G., & Hoffmann, A. (2007). Monetary policy, vagabonding liquidity and bursting bubbles in new and emerging markets—an overinvestment view. CESifo Working Paper, No. 2100, September.Google Scholar
  42. Selgin, G. (1988). Theory of free banking: money supply under competitive note issue. Totowa: Roman and Littlefield.Google Scholar
  43. Skousen, M. (2005). Vienna & Chicago: friends of foes?. Washington, DC: Capital.Google Scholar
  44. Stucken, R. (1953). Deutsche Geld- und Kreditpolitik 1914–1953 (2nd ed.). Tübingen: J.C.B. Mohr (Paul Siebeck).Google Scholar
  45. Svensson, L. (2002). Monetary policy and real stabilization. Proceedings, Federal Reserve Bank of Kansas City, 261–312, http://www.princeton.edu/~svensson/papers/jh02.pdf
  46. von Hayek, F. A. (1934). The maintenance of capital. Economica, Vol. II, August, reprinted in: Hayek, F. A. von, 1939. Profits, interest and investment—and other essays on the theory of industrial fluctuations. London: Routledge: 83–134.Google Scholar
  47. von Mises, L. (1912). Theorie des Geldes und der Umlaufsmittel. Munich: Duncker & Humblot.Google Scholar
  48. von Mises, L. (1996). A critique of interventionism. Revised edition. Irvington-on-Hudson: The Foundation for Economic Education.Google Scholar
  49. von Mises, L. (1998). Human action, scholar’s edition. Auburn: Ludwig von Mises Institute.Google Scholar
  50. Wainhouse, C. (1984). Empirical evidence for Hayek’s theory of economic fluctuations. In B. Siegel (Ed.), Money in crisis (pp. 37–71). San Francisco: Pacific Institute for Public Policy Research.Google Scholar
  51. White, L. (1989). Competition and currency. Essays on free banking and money. New York: New York University Press.Google Scholar
  52. White, W. (2006). Is price stability enough? BIS Working Papers, No. 205, April.Google Scholar
  53. Wicker, E. R. (1966). Federal Reserve Monetary Policy 1917–1933. New York: Random House.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Department of Applied Economics IUniversity Rey Juan CarlosMadridSpain

Personalised recommendations