The Review of Austrian Economics

, Volume 27, Issue 3, pp 281–299 | Cite as

The Mises-Hayek business cycle theory, fiat currencies and open economies

  • Nicolas CachanoskyEmail author


This paper extends the Mises-Hayek business cycle theory to open economies with fiat currencies. I explore: (1) the problem of domestic versus international monetary policy with fiat currencies in an international setting. (2) How the feedback effects between central banks in the context of an expansionary monetary contributes to extend and transmit a Mises-Hayek business cycle from big economies to small financially integrated economies. I find that a lengthening of the period of production is not the only effect produced on the capital structure, but also a misallocation of capital goods between the production of tradable and non-tradable goods and services and that business cycles can become more severe when there are open economies with fiat currencies.


Austrian business cycle theory Fiat currencies Exchange rate International business cycle 

JEL Codes

B53 E32 E58 F44 



I appreciate comments from Andreas Hoffmann, GP Manish, Ryan Murphy, Malavika Nair and Benjamin W. Powell, Andrew T. Young, and an anonymous referee. The usual caveats apply.


  1. Aglietta, M., & Rzepkowski, B. (2004). The Asian central banks and the dollar. La Lettre du CEPII, 230, 1–4.Google Scholar
  2. Ahrend, R., Cournède, B., & Price, R. (2008). Monetary policy, market excesses and financial turmoil.Google Scholar
  3. Balassa, B. (1964). The purchasing-power parity doctrine: a reappraisal. Journal of Political Economy, 72(6), 584–596.CrossRefGoogle Scholar
  4. Barnett, W., II, & Block, W. E. (2005). Professor Tullock on Austrian business cycle theory. Advances in Austrian Economics, 8, 431–443. doi: 10.1016/S1529-2134(05)08018-X.CrossRefGoogle Scholar
  5. Barnett, W., II, & Block, W. E. (2006). Tyler Cowen on Austrian business cycle theory: a critique. New Perspectives on Political Economy, 2(2), 26–85.Google Scholar
  6. Bergin, P.R., Glick, R., & Wu, J.-L. (2010). The micro-macro disconnect of purchasing power parity. San Francisco.Google Scholar
  7. Betts, C. M., & Kehoe, T. J. (2006). U.S. real exchange rate fluctuations and relative price fluctuations. Journal of Monetary Economics, 53(7), 1297–1326. doi: 10.1016/j.jmoneco.2005.05.011.CrossRefGoogle Scholar
  8. Block, W. E. (2001). Yes, we have no chaff: a reply to Wagner’s “Austrian Cycle Theory: Saving the Wheat While Discarding the Chaff”. Quarterly Journal of Austrian Economics, 4(1), 63–73.CrossRefGoogle Scholar
  9. Borio, C., & Disyatat, P. (2011). Global imbalances and the financial crisis: Link or no link? Basel.Google Scholar
  10. Burstein, A., Eichenbaum, M., & Rebelo, S. (2006). The importance of nontradable Goods’ prices in cyclical real exchange rate fluctuations. Japan and the World Economy, 18(3), 247–253. doi: 10.1016/j.japwor.2006.02.003.CrossRefGoogle Scholar
  11. Caballero, R. J. (2010). Macroeconomics after the crisis: time to deal with the pretense-of-knowledge syndrome. Journal of Economic Perspectives, 24(4), 85–102. doi: 10.1257/jep. 24.4.85.CrossRefGoogle Scholar
  12. Callahan, G., & Horwitz, S. G. (2010). The role of ideal types in Austrian business cycle theory. Advances in Austrian Economics, 14(2010), 205-224. Elsevier. doi: 10.1108/S1529-2134(2010)0000014013
  13. Calvo, G. A., & Mishkin, F. S. (2003). The mirage of exchange rate regimes for emerging market countries. Journal of Economic Perspectives, 17(4), 99–118.CrossRefGoogle Scholar
  14. Calvo, G. A., & Reinhart, C. (2002). Fear of floating. The Quarterly Journal of Economics, 117(2), 379–408.CrossRefGoogle Scholar
  15. Canova, F. (2005). The transmission of US shocks to Latin America. Journal of Applied Econometrics, 20(2), 229–251. doi: 10.1002/jae.837.CrossRefGoogle Scholar
  16. Caplan, B. (1997). Why I am not an Austrian economist. Unpublished manuscript.Google Scholar
  17. Carilli, A. M., & Dempster, G. M. (2001). Expectations in Austrian business cycle theory: an application of the Prisoner’s dilemma. The Review of Austrian Economics, 14(4), 319–330.CrossRefGoogle Scholar
  18. Chari, V. V., Kehoe, P. J., & McGrattan, E. R. (2002). Can sticky price models generate volatile and persistent real exchange rates ? The Review of Economic Studies, 69, 533–563.CrossRefGoogle Scholar
  19. Chen, S.-S., & Engel, C. (2005). Does “aggregation bias” explain the PPP puzzle? Pacific Economic Review, 10(1), 49–72.CrossRefGoogle Scholar
  20. Chirinko, R. S. (2008). σ: the long and short of it. Journal of Macroeconomics, 30(2), 671–686. doi: 10.1016/j.jmacro.2007.10.010.CrossRefGoogle Scholar
  21. Corsetti, G. (2008). A modern reconsideration of the theory of optimal currency areas.Google Scholar
  22. Corsetti, G., Pesenti, P., Roubini, N., & Tille, C. (1999). Competitive devaluations: A welfare-based approach. Cambridge.Google Scholar
  23. Cowen, T. (1997). Risk and business cycles: New and old Austrian perspectives. New York: Routledge.Google Scholar
  24. di Giovanni, J., & Shambaugh, J. C. (2008). The impact of foreign interest rates on the economy: the role of the exchange rate regime. Journal of International Economics, 74(2), 341–361. doi: 10.1016/j.jinteco.2007.09.002.CrossRefGoogle Scholar
  25. Diamond, D. W., & Rajan, R. G. (2009a). The credit crisis: conjectures about causes and remedies. American Economic Review, 99(2), 606–610. doi: 10.1257/aer.99.2.606.CrossRefGoogle Scholar
  26. Diamond, D.W., & Rajan, R.G. (2009b). Illiquidity and interest rate policy. Cambridge.Google Scholar
  27. Dotsey, M., & Duarte, M. (2008). Nontraded goods, market segmentation, and exchange rates. Journal of Monetary Economics, 55(6), 1129–1142. doi: 10.1016/j.jmoneco.2008.07.011.CrossRefGoogle Scholar
  28. Dowd, K. (2009). Moral hazard and the financial crisis. Cato Journal, 29(1), 141–166.Google Scholar
  29. Ehrmann, M., & Fratzscher, M. (2009). Global financial transmission of monetary policy shocks. Oxford Bulletin of Economics and Statistics, 71(6), 739–759. doi: 10.1111/j.1468-0084.2009.00561.x.CrossRefGoogle Scholar
  30. Eichengreen, B. (2004). Global imbalances and the lessons of Bretton Woods. Cambridge.Google Scholar
  31. Eichengreen, B., & Temin, P. (2000). The gold standard and the great depression. Contemporary European History, 9(2), 183–207.CrossRefGoogle Scholar
  32. Engel, C. (1999). Accounting for U.S. real exchange rate changes. Journal of Political Economy, 107(3), 507–538.CrossRefGoogle Scholar
  33. Evans, A. J., & Baxendale, T. (2008). Austrian business cycle theory in light of rational expectations: the role of heterogeneity, the monetary footprint, and adverse selection in monetary expansion. The Quarterly Journal of Austrian Economics, 11(2), 81–93. doi: 10.1007/s12113-008-9034-6.CrossRefGoogle Scholar
  34. Gadea, M. D., & Mayoral, L. (2009). Aggregation is not the solution: the PPP puzzle strikes back. Journal of Applied Econometrics, 24(6), 875–894. doi: 10.1002/jae.1078.CrossRefGoogle Scholar
  35. Garrison, R. W. (1986). From Lachmann to Lucas: on institutions, expectations, and equilibrating tendencies. In I. M. Kirzner (Ed.), Subjectivism, intelligibility and economic understanding (pp. 87–101). New York: New York University Press and Macmillan Co.Google Scholar
  36. Garrison, R. W. (2009). Interest-rate targeting during the great moderation: a reappraisal. Cato Journal, 29(1), 187–200.Google Scholar
  37. Groen, J.J.J., & Lombardelli, C. (2004). Real exchange rates and the relative prices of non-traded and traded goods: An empirical analysis. London.Google Scholar
  38. Haberler, G. (1937). Prosperity and depression (1946th ed.). New York: United Nations.Google Scholar
  39. Hayek, F. A. (1931). Prices and production (1967th ed.). New York: Augustus M. Kelley.Google Scholar
  40. Hayek, F. A. (1937). Monetary nationalism and international stability (1989th ed.). Fairfield: Augustus M. Kelley.Google Scholar
  41. Hoffmann, A. (2010). An overinvestment cycle in Central and Eastern Europe? Metroeconomica, 61(4), 711–734. doi: 10.1111/j.1467-999X.2010.04103.x.CrossRefGoogle Scholar
  42. Hoffmann, A., & Schnabl, G. (2011a). A vicious cycle of manias, crises and asymmetric policy responses—an overinvestment view. The World Economy, 34(3), 382–403. doi: 10.1111/j.1467-9701.2011.01334.x.CrossRefGoogle Scholar
  43. Hoffmann, A., & Schnabl, G. (2011b). National monetary policy, international economic instability and feedback effects -an overinvestment view. Working Papers on Global Financial Markets.Google Scholar
  44. Horwitz, S. G. (2000). Microfoundations and macroeconomics: An Austrian perspective (2003rd ed.). London: Routledge.CrossRefGoogle Scholar
  45. Horwitz, S.G. (2011). The expanding sphere of opportunities. The Freeman Online.Google Scholar
  46. Hummel, J. R. (1979). Problems with Austrian business cycle theory. Reason Papers, 5(Winter), 41–53.Google Scholar
  47. Imbs, J., Mumtaz, H., Ravn, M. O., & Rey, H. (2005). PPP strikes back: aggregation and the real exchange rate. The Quarterly Journal of Economics, CXX(1), 1-43.Google Scholar
  48. Lachmann, L. M. (1977). In W. E. Grinder (Ed.), Capital, expectations, and the market process. Kansas City: Sheed Andrews and McMeel.Google Scholar
  49. Lal, D. (2010). The great crash of 2008: causes and consequences. Cato Journal, 30(2), 265–277.Google Scholar
  50. Leijonhufvud, A. (2007). Monetary and financial stability. London.Google Scholar
  51. Leijonhufvud, A. (2009a). Out of the corridor: Keynes and the crisis. Cambridge Journal of Economics, 33(4), 741–757. doi: 10.1093/cje/bep022.CrossRefGoogle Scholar
  52. Leijonhufvud, A. (2009b). Two systemic problems. London.Google Scholar
  53. Lewin, P. (1999). Capital in Disequilibrium (2011st ed.). Auburn: Ludwig von Mises Institute.Google Scholar
  54. McKinnon, R. (1963). Optimum currency areas. American Economic Review, 53(4), 717–725.Google Scholar
  55. McKinnon, R. (1993). The rules of the game: international money in historical perspective. Journal of Economic Literature, 31, 1–44.Google Scholar
  56. McKinnon, R. (2010). Rehabilitating the unloved dollar standard. Asian-Pacific Economic Literature, 24(2), 1–18. doi: 10.1111/j.1467-8411.2010.01258.x.CrossRefGoogle Scholar
  57. Meltzer, A. H. (2009). Reflections on the financial crisis. Cato Journal, 29(1), 25–30.Google Scholar
  58. Morgenstern, O. (1950). On the accuracy of economic observations (1963rd ed.). Princeton: Princeton University Press.Google Scholar
  59. Mundell, R. A. (1961). A theory of optimum currency areas. American Economic Review, 51(4), 657–665.Google Scholar
  60. O’Driscoll, G. P. J. (2009). Money and the present crisis. Cato Journal, 29(1), 167–186.Google Scholar
  61. O’Driscoll, G. P. J. (2011). Money, prices, and bubbles. Cato Journal, 31(3), 441–459.Google Scholar
  62. O’Driscoll, G. P. J., & Rizzo, M. J. (1985). In M. J. Rizzo & L. H. White (Eds.), The economics of time and ignorance (1996th ed.). New York: Routledge.Google Scholar
  63. Obstfeld, M., & Rogoff, K. (1996). Foundations of international macroeconomies. Cambridge: MIT.Google Scholar
  64. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2010). Financial stability, the trilemma, and international reserves. American Economic Journal: Macroeconomics, 2(2), 57–94. doi: 10.1257/mac.2.2.57.Google Scholar
  65. Ohanian, L. E. (2010). The economic crisis from a neoclassical perspective. Journal of Economic Perspectives, 24(4), 45–66. doi: 10.1257/jep. 24.4.45.CrossRefGoogle Scholar
  66. Oppers, S.E. (2002). The Austrian theory of business cycles: Old lessons for modern economic policy?Google Scholar
  67. Powell, B. (2010). Some implications of capital heterogeneity. In P. J. Boettke (Ed.), Handbook on contemporary Austrian economics (pp. 124–135). Cheltenham and Northampton: Edward Elgar.Google Scholar
  68. Reinhart, C., & Rogoff, K. (2009). This time is different. Princeton: Princeton University Press.Google Scholar
  69. Ritchie, D. (2005). Hacia Una Macroeconomía Austriaca de una Economía Abierta. Libertas, 43, 111–170.Google Scholar
  70. Rogoff, K. (1996). The purchasing power parity puzzle (pp. 647–668). 34: Journal of Economic Literature.Google Scholar
  71. Rogoff, K. (2009). Exchange rates in the modern floating Era: what do we really know? Review of World Economics, 145(1), 1–12. doi: 10.1007/s10290-009-0006-5.CrossRefGoogle Scholar
  72. Salerno, J. T. (1989). Comment on Tullock’s “Why Austrians are wrong about depressions”. The Review of Austrian Economics, 3(1), 141–145. doi: 10.1007/BF01539565.CrossRefGoogle Scholar
  73. Samuelson, P. A. (1964). Theoretical notes on trade problems. The Review of Economics and Statistics, 46(2), 145–154.CrossRefGoogle Scholar
  74. Schwartz, A. J. (2009). Origins of the financial market crisis of 2008. Cato Journal, 29(1), 19–23.Google Scholar
  75. Selgin, G. A. (1996). Bank deregulation and monetary order (2002nd ed.). New York: Routledge.CrossRefGoogle Scholar
  76. Selgin, G. A. (1997). Less than zero. London: The Institute of Economic Affairs.Google Scholar
  77. Selgin, G.A., Beckworth, D., & Bahadir, B. (2011). The productivity gap: Productivity surges as a source of monetary excess. Unpublished paper.Google Scholar
  78. Stockman, A. C., & Tesar, L. L. (1995). Tastes and technology in a two-country model of the business cycle: explaining international comovements. The American Economic Review, 85(1), 168–184.Google Scholar
  79. Taylor, J. B. (2009). Getting Off track. Stanford: Hoover Institute Press.Google Scholar
  80. Tullock, G. (1988). Why the Austrians are wrong about depressions. The Review of Austrian Economics, 2(1), 73–78.CrossRefGoogle Scholar
  81. Tullock, G. (1989). Reply to comment by Joseph T. Salerno. The Review of Austrian Economics, 3(1), 147–149.CrossRefGoogle Scholar
  82. Wagner, R. E. (1999). Austrian cycle theory: saving the wheat while discarding the chaff. The Review of Austrian Economics, 12, 65–80.CrossRefGoogle Scholar
  83. White, L. H. (1989). Competition and currency. New York: New York University Press.Google Scholar
  84. White, W.R. (2006). Is price stability enough? Basel.Google Scholar
  85. White, L. H. (2007). What type of inflation target? Cato Journal, 27(2), 283–288.Google Scholar
  86. White, L.H. (2008). How did we get into this financial mess? Washington D.C.Google Scholar
  87. White, W.R. (2009). Modern macroeconomics is on the wrong track. Finance & Development, December, 15-18.Google Scholar
  88. Young, A. T. (2011). The time structure of production in the US, 2002–2009. The Review of Austrian Economics. doi: 10.1007/s11138-011-0158-0.
  89. Young, A.T. (2012). U.S. Elasticities of Substitution and Factor Augmentation At the Industry Level. Macroeconomic Dynamics, 1-37. doi: 10.1017/S1365100511000733

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Department of EconomicsSuffolk UniversityBostonUSA

Personalised recommendations