Atlantic Economic Journal

, Volume 42, Issue 2, pp 153–169 | Cite as

An Empirical Analysis of the Austrian Business Cycle Theory

  • William J. Luther
  • Mark Cohen


The Austrian economists Ludwig von Mises and Friedrich A. Hayek developed a unique theory of the business cycle. In their view, an unsustainable boom ensues when the rate of interest prevailing in the market falls below the natural rate. The boom is characterized not only by an increase in aggregate production but also by a distortion of the structure of production. Similarly, the recession that follows is characterized by a decline in aggregate production as the structure of production is repaired. Hence, the Austrian account of macroeconomic fluctuation stresses the misallocation and reallocation of resources in addition to the overproduction and underproduction of more conventional business cycle theories. In a recent article, Lester and Wolff (Review of Austrian Economics 26(4):433–461, 2013) attempt to consider the empirical relevance of the Austrian view. We argue that the authors’ use of the federal funds rate as an indicator of monetary policy is inappropriate in that it fails to distinguish a low market interest rate from a market interest rate that is low relative to the natural rate. Using an estimate of the natural rate provided by Selgin et al. (2011), we attempt to improve upon their analysis.


Austrian Boom Business cycle Bust Federal funds rate Friedrich A. Hayek Interest rate Ludwig von Mises Macroeconomic fluctuation Monetary policy Producer price index Productivity rule Stage of process Taylor rule 


B53 E32 E52 E53 


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© International Atlantic Economic Society 2014

Authors and Affiliations

  1. 1.Department of EconomicsKenyon CollegeGambierUSA

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