Advertisement

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
Article

Abstract

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.

Keywords

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 

JEL

B53 E32 E52 E53 

References

  1. Bernanke, B. S., & Blinder, A. S. (1992). The federal funds rate and the channels of monetary transmission. American Economic Review, 82(4), 901–921.Google Scholar
  2. Bismans, F., & Mougeot, C. (2009). Austrian business cycle theory: empirical evidence. Review of Austrian Economics, 22(3), 241–57.CrossRefGoogle Scholar
  3. Boettke, P. J., & Luther, W. J. (2010). The ordinary economics of an extraordinary crisis. In S. Kates (Ed.), Macroeconomic theory and its failings: Alternative perspectives on the global financial crisis. Cheltenham: Edward Elgar.Google Scholar
  4. Carilli, A. M., & Dempster, G. M. (2008). Is the Austrian business cycle still relevant? Review of Austrian Economics, 21(4), 271–81.CrossRefGoogle Scholar
  5. Christiano, L. J., Eichenbaum, M., & Evans, C. L., (1998). “Modeling money.” National Bureau of Economic Research Working Paper 6371.Google Scholar
  6. Christiano, L., Eichenbaum, M., & Evans, C. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1–45.Google Scholar
  7. Fernald, J., (2012). “A Quarterly, Utilization-adjusted series on total factor productivity.” Federal reserve bank of San Francisco working paper.Google Scholar
  8. Garrison, R. (2001). Time and money: the macroeconomics of capital structure. London: Routledge.Google Scholar
  9. Garrison, R. (2004). Overconsumption and forced saving in the Mises-Hayek theory of the business cycle. History of Political Economy, 36(2), 323–49.Google Scholar
  10. Garrison, R. (2005). The Austrian school: capital-based macroeconomics. In B. Snowden & A. Vane (Eds.), Modern macroeconomics. Aldershot: Edward Elgar.Google Scholar
  11. Garrison, R. (2006). Natural and neutral rates of interest in theory and policy formulation. Quarterly Journal of Austrian Economics, 9(4), 57–68.CrossRefGoogle Scholar
  12. Hayek, F. A. (1935). Prices and production (2nd ed.). New York: Augustus M. Kelly.Google Scholar
  13. Horwitz, S. G. (2000). Microfoundations and macroeconomics: an Austrian perspective. London: Routledge.CrossRefGoogle Scholar
  14. Horwitz, S. G., (2012). “The Empirics of Austrian Economics.” Cato Unbound, September 5. Available online: http://www.cato-unbound.org/2012/09/05/steven-horwitz/empirics-austrian-economics
  15. Horwitz, S. G., & Luther, W. J. (2011). The great recession and its aftermath from a monetary equilibrium theory perspective. In S. Kates (Ed.), The Global Financial Crisis: What Have We Learnt? Cheltenham: Edward Elgar.Google Scholar
  16. Keeler, J. (2001). Empirical evidence of the Austrian business cycle theory. Review of Austrian Economics, 14(4), 331–51.CrossRefGoogle Scholar
  17. Koppl, R., & Luther, W. J. (2012). Hayek, Keynes, and modern macroeconomics. Review of Austrian Economics, 25(3), 223–241.CrossRefGoogle Scholar
  18. Lester, R. B., & Wolff, J. S. (2013). The empirical relevance of the Mises-Hayek theory of the trade cycle. Review of Austrian Economics, 26(4), 433–461.CrossRefGoogle Scholar
  19. Lucas, R. E., Jr. (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103–124.CrossRefGoogle Scholar
  20. Luther, W. J., & Cohen. M., (2013). “On the Empirical Relevance of the Mises-Hayek Theory of the Trade Cycle.” Working Paper. Available online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2345751
  21. Luther, W. J., & McElyea. J. P., (2014). “Austrian macroeconomics in search of its uniqueness.” Working Paper.Google Scholar
  22. Mankiw, N. G., & Reis. R., (2001). “Sticky information: A model of monetary Nonneutrality and Structural Slumps.” NBER Working Paper, No. 8614.Google Scholar
  23. Mankiw, N. G., & Reis, R. (2002). Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics, 117(4), 1295–1328.CrossRefGoogle Scholar
  24. Mankiw, N. G., & Reis, R. (2007). Sticky Information in general equilibrium. Journal of the European Economic Association, 5(2–3), 603–613.CrossRefGoogle Scholar
  25. von Mises, L. (1912). The theory of money and credit (p. 1953). New Haven: Yale.Google Scholar
  26. von Mises, L., (2011). On the manipulation of money and credit: three treatises on trade- cycle theory, B. Greaves (transl.), P. Greaves (ed.). Indianapolis: Liberty Fund.Google Scholar
  27. Mulligan, R. F. (2002). A Hayekian analysis of the term structure of production. Quarterly Journal of Austrian Economics, 5(2), 17–33.CrossRefGoogle Scholar
  28. Mulligan, R. F. (2005). The Austrian business cycle: a vector error-correction model with commercial and industrial loans. Journal of Private Enterprise, 22(1), 51–91.Google Scholar
  29. Mulligan, R. F. (2006). An empirical examination of the Austrian business cycle theory. Quarterly Journal of Austrian Economics, 9(2), 69–93.CrossRefGoogle Scholar
  30. Mulligan, R. F. (2010). A fractal comparison of real and Austrian business cycle models. Physica A, 389(11), 2244–2267.CrossRefGoogle Scholar
  31. Murphy, R. P., Barnett, W., II, & Block, W. E. (2009). Testing Austrian business cycle theory? A rejoinder to Andrew T. Young. Journal of Business and Economic Perspectives, 35(2), 73–86.Google Scholar
  32. Murphy, R. P., Barnett, W., II, & Block, W. E. (2012). Testing Austrian business cycle theory? A second rejoinder to Andrew Young. Romanian Economic Business Review, 7(3), 7–20.Google Scholar
  33. Selgin, G. A., Beckworth, D., & Bahadir. B., (2011). “The Productivity Gap: Productivity Surges as a Source of Monetary Excess.” Working Paper. Available online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966659
  34. Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195–214.CrossRefGoogle Scholar
  35. Taylor, J. B. (1999). A historical analysis of monetary policy rules. Monetary policy rules (pp. 319–348). Chicago: University of Chicago.Google Scholar
  36. White, L. H. (2008). “How did we get into this financial mess?” Cato briefing paper, No. 110. Washington, DC: Cato Institute.Google Scholar
  37. White, L. H. (2011). A gold standard with free banking would have restrained the boom and bust. Cato Journal, 31(3), 497–504.Google Scholar
  38. White, L. H. & Selgin. G. A., (2013). “The Austrian theory of the business cycle in a fiat money regime.” Working paper.Google Scholar
  39. Young, A. T. (2005). Reallocating labor to initiate changes in capital structures: Hayek revisited. Economic Letters, 89(3), 275–82.CrossRefGoogle Scholar
  40. Young, A. T. (2011). Illustrating the importance of Austrian business cycle theory: a reply to Murphy, Barnett and Block: a call for quantitative study. Review of Austrian Economics, 24(1), 19–28.CrossRefGoogle Scholar
  41. Young, A. T. (2012). The time structure of production in the US, 2002–2009. Review of Austrian Economics, 25(2), 77–92.CrossRefGoogle Scholar

Copyright information

© International Atlantic Economic Society 2014

Authors and Affiliations

  1. 1.Department of EconomicsKenyon CollegeGambierUSA

Personalised recommendations