Intertemporal capital substitution and Hayekian booms

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Abstract

Hayek’s business cycle theory portrays monetary expansion and monetary contraction with counterintuitive asymmetry. On the one hand, it suggests that they both change relative prices and cause costly reallocations of production factors. At the same time, the theory predicts that while a monetary contraction causes the economic crisis, the monetary expansion comes with the boom. I argue that what I call intertemporal capital substitution in industries close to final consumption explains why there is a boom in spite of the costly reallocations. More specifically, monetary expansion only gradually increases the demand for nonspecific factors of production by industries that are temporally remote from final consumption. Responding to the expected higher cost of nonspecific factors, consumer-goods industries temporarily increase output and depreciate specific durable production factors faster than they planned.

Keywords

Capacity utilization Hayek Business cycle Intertemporal capital substitution 

JEL classification

E14 E22 E32 E43 

Notes

Acknowledgements

I would like to thank to Harry David, Steven Horwitz, Pavel Kuchař, G.P. Manish, Caryn Werner, and participants of APEE 2015 conference for valuable comments and suggestions on the earlier draft of this paper. I am also thankful to Stephen Williamson, whose textbook inspired me to think of the tools that I used in the paper. I gratefully acknowledge the financial help that I received from Academic Support Committee at Allegheny College, and Center for the History of Political Economy at Duke University while working on this project. I am responsible for all errors.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Economics Department, Allegheny CollegeMeadvilleUSA

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