Skip to main content
Log in

The international business cycle as intertemporal coordination failure

The Review of Austrian Economics Aims and scope Submit manuscript


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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10


  1. Trade share is the quantity of imports and exports of a given good during a given period divided by the imports and exports of all goods traded during that period.

  2. The same idea is often expressed in nominal terms in the following form: IRD=IRA*E[ER]/ER, where IR stands for nominal interest rate and ER for nominal exchange rate expressed as $D/$A, and E[x] represents expectation of variable x in the corresponding period in the future. Assuming that PD and PA represent price levels in D and A respectively, one can express that IRD=RIRD*(E[PD]/PD) and IRA=RIRA*(E[PA]/PA). It is also the case that ER=RER* PD/PA and E[ER]= E[RER]* E[PD]/E[PA]. After substitution into IRD=IRA*E[ER]/ER, one gets the following:

    RIRD*(E[PD]/PD)= RIRA*(E[PA]/PA)* (E[RER]* E[PD]/E[PA])/( RER* PD/PA).

    After rearrangement:

    RIRD= RIRA* E[RER]/RER*(PD/E[PD])* (E[PA]/PA)*(E[PD]/E[PA])*(PA/PD).

    And this is identical to the expression RIRD=RIRA*E[RER]/RER.

  3. The previous conclusion about the procyclical character of real imports and real exports in country D depends on an implicit assumption. While the expansionary monetary policy in country D might tend to increase the demand for imports through changes in the real interest rate, it also has an opposite tendency through the depreciated foreign exchange rate. The depreciation of $D makes imports more expensive and gives people an incentive to import less. Imports of country D therefore increase only if the effect of changes in the real interest rate is stronger than the counteracting effect of the foreign exchange rate.


  • Altman, E. I. (1983). Why businesses fail. The Journal of Business Strategy, 3, 15–21.

    Article  Google Scholar 

  • Ambler, S., Cardia, E., & Zimmermann, C. (2004). International business cycles: what are the facts? Journal of Monetary Economics, 51, 257–276.

    Article  Google Scholar 

  • Arkolakis, C., & Ramanarayanan, A. (2009). Vertical specialization and international business cycle synchronization. The Scandinavian Journal of Economics, 111, 655–680.

    Article  Google Scholar 

  • Backus, D. K., & Kehoe, P. J. (1992). International evidence on the historical properties of business cycles. The American Economic Review, 82, 864–888.

    Google Scholar 

  • Backus DK, Kehoe PJ, Kydland FE (1993) International Business Cycles: Theory and Evidence. NBER Working Paper No. 4493

  • Barro, R. J., & Tenreyro, S. (2006). Closed and open economy models of business cycles with marked up and sticky prices. The Economic Journal, 116, 434–456.

    Article  Google Scholar 

  • Baxter M (1995) International Trade and Business Cycles. NBER Working Paper No. 5025.

  • Bilo S. (2015) Fixing Hayek’s Business Cycle Theory: How Unbiased Expectations Lead to Cluster of Errors. Manuscript.

    Google Scholar 

  • Boileau, M. (2002). Trade in capital goods and investment-specific technical change. Journal of Economic Dynamics and Control, 26, 963–984.

  • Böhm-Bawerk, E. (1959). Capital and interest: Positive theory of capital. South Holland: Libertarian Press.

  • Burstein, A., Kurz, C., & Tesar, L. (2008). Trade, production sharing, and the international transmission of business cycles. Journal of Monetary Economics, 55, 775–795.

    Article  Google Scholar 

  • Cachanosky N (2012) The Mises-Hayek Business Cycle Theory, Fiat Currencies and Open Economies. The Review of Austrian Economics. doi:10.1007/s11138–012–0188-2

  • Cachanosky, N. (2014). The effects of U.S. monetary policy on Colombia and Panama (2002-2007. The Quarterly Review of Economics and Finance, 54, 428–436. doi:10.1016/j.qref.2014.03.003.

    Article  Google Scholar 

  • Cachanosky, N. (2015). U.S. monetary Policy’s impact on Latin America’s structure of production (1960-2010). Latin American. Journal of Economics, 51, 95–116. doi:10.7764/LAJE.52.1.95.

    Google Scholar 

  • Cachanosky, N., & Hoffmann, A. (2016). Monetary policy, the composition of GDP and crisis duration in Europe. Global Economic Review, 45, 206–219. doi:10.1080/1226508X.2015.1137484.

    Article  Google Scholar 

  • Catalano, R., Goldman-Mellor, S., Saxton, K., Margerison-Zilko, C., Subbaraman, M., LeWinn, K., & Anderson, E. (2011). The health effects of economic decline. Annual Review of Public Health, 32, 432–450.

  • Di Giovanni, J., & Levchenko, A. A. (2010). Putting the parts together: trade, vertical linkages, and business cycle comovement. American Economic Journal: Macroeconomics, 2, 95–124.

    Google Scholar 

  • Eichenbaum, M., & Evans, C. L. (1995). Some empirical evidence on the effects of shocks to monetary policy on exchange rates. The Quarterly Journal of Economics, 110, 975–1009.

    Article  Google Scholar 

  • Engel, C., & Wang, J. (2011). International trade in durable goods: understanding volatility, cyclicality, and elasticities. Journal of International Economics, 83, 37–52.

    Article  Google Scholar 

  • Erceg, C. J., Guerrieri, L., & Gust, C. (2008). Trade Adjustment and the Composition of Trade. Journal of Economic Dynamics and Control, 32, 2622–2650.

    Article  Google Scholar 

  • Frankel, J. A., & Rose, A. K. (1998). The endogeneity of the optimum currency area criteria. The Economic Journal, 108, 1009–1025.

    Article  Google Scholar 

  • Garrison, R. W. (2001). Time and Money: The Macroeconomics of Capital Structure. New York: Routledge.

    Google Scholar 

  • Harada, N., & Kageyama, N. (2011). Bankruptcy dynamics in Japan. Japan and the World Economy, 23, 119–128.

    Article  Google Scholar 

  • Hayek, F. A. (1937). Monetary nationalism and international stability. Geneva and London: Longmans and The Graduate Institute of International Studies in Geneva.

  • Hayek, F. A. (1967). Prices and Production. Kelly, New York: Augustus M.

    Google Scholar 

  • Hayek FA (1975 [1939]) Profits, Interest and Investment. In: Hayek FA Profits, Interest, and Investment and Other Essays on the Theory of Industrial Fluctuations. Augustus M. Kelley, Clifton, pp 3–72.

  • Hoffmann, A. (2010). An overinvestment cycle in central and Eastern Europe? Metroeconomica, 61, 711–734.

    Article  Google Scholar 

  • Huang, K. X. D., & Liu, Z. (2007). Business cycles with staggered prices and international trade in intermediate inputs. Journal of Monetary Economics, 54, 1271–1289.

    Article  Google Scholar 

  • Luo, F., Florence, C. S., Quispe-Agnoli, M., Ouyang, L., & Crosby, A. E. (2011). Impact of business cycles on US suicide rates, 1928–2007. American Journal of Public Health, 101, 1139–1146.

    Article  Google Scholar 

  • Machlup, F. (1940). The Stock Market. William Hodge and Company, London, Edinburgh, Glasgow: Credit and Capital Formation.

    Google Scholar 

  • Mises, L. (1943). Elastic expectations” and the Austrian theory of the trade cycle. Economica, 10, 251–252.

    Article  Google Scholar 

  • Mises, L. (1971). The Theory of Money and Credit. New York: The Foundation for Economic Education.

    Google Scholar 

  • Ng, E. C. Y. (2010). Production fragmentation and business-cycle comovement. Journal of International Economics, 82, 1–14.

    Article  Google Scholar 

  • Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. The. Journal of Political Economy, 103, 624–660.

    Article  Google Scholar 

  • Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2005). The trilemma in history: tradeoffs among exchange rates, monetary policies, and capital mobility. The Review of Economics and Statistics, 87, 423–438.

    Article  Google Scholar 

  • Oviedo, M. P., & Singh, R. (2012). Investment Composition and International Business Cycles. Journal of International Economics. doi:10.1016/j.jinteco.2012.04.006.

    Google Scholar 

  • Platt, H. D., & Platt, M. B. (1994). Business cycle effects on state corporate failure rates. Journal of Economics and Business, 46, 113–127.

    Article  Google Scholar 

  • Ravn, M. O. (1997). International business cycles in theory and in practice. Journal of International Money and Finance, 16, 255–283.

    Article  Google Scholar 

  • Robbins, L. (1971). The Great Depression. Freeport, NY: Books for Libraries Press.

    Google Scholar 

  • Rothbard, M. N. (2000). America’s Great Depression (5th ed.). Auburn, Alabama: The Ludwig von Mises Institute.

    Google Scholar 

  • Ruhm, C. J. (2000). Are recessions good for your health? The Quarterly Journal of Economics, 115, 617–650.

    Article  Google Scholar 

  • Santoro, E., & Gaffeo, E. (2009). Business failures, macroeconomic risk and the effect of recessions on long-run growth: a panel Cointegration approach. Journal of Economics and Business, 61, 435–452.

    Article  Google Scholar 

  • Sargent TJ (2011) United States Then, Europe Now. Accessed 11 March 2016

  • Snipes, M., Cunha, T. M., & Hemley, D. D. (2011). An empirical investigation into the relationship between changes in the business cycle and the incidence of suicide. International Journal of Social Economics, 38, 477–491.

    Article  Google Scholar 

  • Stuckler, D., Basu, S., Suhrcke, M., Coutts, A., & McKee, M. (2009). The public health effect of economic crises and alternative policy responses in Europe: an empirical analysis. Lancet, 374, 315–323.

    Article  Google Scholar 

  • Warner, A. M. (1994). Does world investment demand determine U.S. exports? The American Economic Review, 84, 1409–1422.

    Google Scholar 

  • White LH (1989) Fix or Float? The International Monetary Dilemma. In: White LH Competition and Currency: Essays on Free Banking and Money. New York University Press, New York and London

  • Wicksell, K. (1962). Interest and Prices: A Study of the Causes Regulating the Value of Money. New York: Sentry Press.

    Google Scholar 

Download references


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.

Author information

Authors and Affiliations


Corresponding author

Correspondence to Simon Bilo.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bilo, S. The international business cycle as intertemporal coordination failure. Rev Austrian Econ 31, 27–49 (2018).

Download citation

  • Published:

  • Issue Date:

  • DOI:


JEL classification