This paper summarizes Horwitz’s contributions in Microfoundations and Macroeconomics: An Austrian Perspective and evaluates its connection with recent contributions in Austrian macroeconomics. The paper emphasizes the connection between relative price, monetary equilibrium, and monetary policy. The paper pays particular attention to the implications of Horwitz’s denomination of capital theory as a “missing link” in economic theory.
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For illustrtion purposes, this is one of the arguments of why the 2008 crisis took place. By targeting price level stability, major central banks went off-track and carried out an interest rate policy that was too low for too long (Taylor 2009). The problem is that price level stability is equivalent to monetary equilibrium only under special conditions (see below). Due to the instituional arrangement in place and to financial market regulations, the monetary disequilibrum took the form of a housing bubble. See Cachanosky (2018, Chapter 6); Selgin et al. (2015); Taylor (2009), White (2008).
Of course there are more complex models that include heterogeneous economic agents. Yet, this is not the core approach in the development of macroeconomic theory. Heterogeneous agents are an addition to simpler models with representative agents rather than being the other way around.
Hayek was far from bieng the only economist at the time of endorsing this principle of monetary equilibrium. See Selgin (1996, Chapter 8).
Following this discussion, a “neutral” monetary policy (in Hayek’s terms) is not the one that would keep relative prices unaffected, but the one that would target monetary equilibrium.
There are, actually, two durations, Macualay duration and modified duration. We discuss their meaning and relationship in our work.
For a review of Austrian friendly reactions after the 2008 crisis see Cachanosky and Salter (2017).
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Cachanosky, N. Microfoundations and macroeconomics: 20 years. Rev Austrian Econ 34, 279–288 (2021). https://doi.org/10.1007/s11138-020-00500-1
- Capital theory
- Monetary equilibrium