The upper turning point in the Austrian business cycle theory

Abstract

This paper defends the relevance of Austrian Business Cycle theory (ABCT) within a fiat money regime, by providing an answer to whether a constant rate of credit expansion necessarily leads to a boom-bust cycle. We claim that this scenario has two potential outcomes, (1) a change in money demand brings the economy back towards equilibrium or (2) the economy will shift to a sub-optimal but still sustainable path. We identify capital heterogeneity effects and the Ricardo effect as distinctly Austrian explanations for an upper turning point, even in a fiat money regime.

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Notes

  1. 1.

    Following the earlier literature we use the term “credit expansion” but “monetary expansion” could be used with no loss of meaning.

  2. 2.

    Cachanosky (2015) and Salter and Luther (2016) provide a more recent account, consistent with rational expectations.

  3. 3.

    Admittedly this rests on an assumption about the propensity to spend of the relevant agents.

  4. 4.

    Hummel (1979) acknowledges the potential for Ricardo effects but points out that this implies an increase in time preferences.

  5. 5.

    Skousen (1988) argues that the manifestation of consumer price inflation will lead to a policy response from central banks, and thus mark the upper turning point.

  6. 6.

    It should be added, however, that this credit expansion should also be moderate enough to not trigger a fall in money demand. This, however, usually becomes a serious issue with high rates of inflation, such as the cases of hyperinflation.

  7. 7.

    Luther and McElyea (2018) provide a rudimentary Austrian model to demonstrate how a stable growth path can be achieved.

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Acknowledgements

We appreciate helpful comments from Jeffrey Rogers Hummel and two anonymous referees from this journal. The usual disclaimer applies.

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Correspondence to Anthony J. Evans.

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Evans, A.J., Cachanosky, N. & Thorpe, R. The upper turning point in the Austrian business cycle theory. Rev Austrian Econ (2020). https://doi.org/10.1007/s11138-019-00497-2

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Jel codes

  • B53
  • E32

Keywords

  • Business cycles
  • Austrian business cycle
  • Turning point