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The Review of Austrian Economics

, Volume 31, Issue 1, pp 27–49 | Cite as

The international business cycle as intertemporal coordination failure

  • Simon BiloEmail author
Article
  • 240 Downloads

Abstract

Where investments are irreversible and the future is uncertain, people in two countries can make investment decisions that turn out to be mutually inconsistent. I argue that this intertemporal coordination failure explains international business cycles in a two-currency-area setting with a floating foreign exchange rate. The sequence of events starts with an expansionary domestic monetary shock, which decreases the domestic real interest rate. Facing low transactions costs, people spend the new money relatively early in the foreign exchange market and in the foreign market for loanable funds. Domestic monetary expansion thereby changes the relative prices of domestic and foreign goods and also of goods of earlier and later stages of production. The relative price changes lead to intertemporal and international coordination failures once the monetary expansion ends and relative prices change. Domestic monetary policy thereby causes the comovement across different currency areas we observe of business cycles.

Keywords

Hayek Nonneutrality of money Intertemporal coordination failure International business cycle Structure of production 

JEL classification

F21 F31 F44 

Notes

Acknowledgments

I would like to thank to Peter Boettke, Anthony Carilli, Harry David, Steven Horwitz, Sanford Ikeda, Paul Lewis, Nandakumar Rajagopalan, Shruti Rajagopalan, Mario Rizzo, Richard Wagner, Lawrence White, participants of Colloquium on Market Institutions and Economic Processes at NYU, and participants of the Graduate Student Paper Workshop at GMU for valuable comments on and suggestions to the earlier drafts of this paper. I gratefully acknowledge the financial help that I received from Bradley Foundation, Center for the History of Political Economy at Duke University, Earhart Foundation, Institute for Humane Studies, and Mercatus Center while working on this project. I am responsible for all errors.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Economics DepartmentAllegheny CollegeMeadvilleUSA

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