The Review of Austrian Economics

, Volume 21, Issue 4, pp 283–300 | Cite as

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

  • Philipp Bagus


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.


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 



Thanks are due to Francesco Carbone, José I. del Castillo Martínez, Barbara A. Hinze, David Howden, Jörg-G. Hülsmann, and an anonymous referee for many helpful comments and suggestions.


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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

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

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