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An Empirical Analysis of the Austrian Business Cycle Theory

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  • William Luther
  • Mark Cohen

Abstract

The Austrian economists Ludwig von Mises and Friedrich A. Hayek developed a unique theory of the business cycle. In their view, an unsustainable boom ensues when the rate of interest prevailing in the market falls below the natural rate. The boom is characterized not only by an increase in aggregate production but also by a distortion of the structure of production. Similarly, the recession that follows is characterized by a decline in aggregate production as the structure of production is repaired. Hence, the Austrian account of macroeconomic fluctuation stresses the misallocation and reallocation of resources in addition to the overproduction and underproduction of more conventional business cycle theories. In a recent article, Lester and Wolff (Review of Austrian Economics 26(4):433–461, 2013 ) attempt to consider the empirical relevance of the Austrian view. We argue that the authors’ use of the federal funds rate as an indicator of monetary policy is inappropriate in that it fails to distinguish a low market interest rate from a market interest rate that is low relative to the natural rate. Using an estimate of the natural rate provided by Selgin et al. ( 2011 ), we attempt to improve upon their analysis. Copyright International Atlantic Economic Society 2014

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  • William Luther & Mark Cohen, 2014. "An Empirical Analysis of the Austrian Business Cycle Theory," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(2), pages 153-169, June.
    • Handle: RePEc:kap:atlecj:v:42:y:2014:i:2:p:153-169
    DOI: 10.1007/s11293-014-9415-5
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    Cited by:

    1. Alonso-Neira, Miguel A. & Sánchez-Bayón, Antonio & Castro-Oliva, Marcos, 2023. "Teoría austriaca del ciclo económico aplicada al caso español: del inicio del euro a la gran recesión y su recuperación [Austrian economic cycle theory applied to the Spanish case: from the begging," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 35(1), pages 280-310, June.
    2. Simon Bilo, 2021. "Hayek’s Theory of Business Cycles: A Theory That Will Remain Obscure?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 36(Fall 2021), pages 27-47.
    3. Cachanosky, Nicolás & Lewin, Peter, 2016. "An empirical application of the EVA® framework to business cycles," Review of Financial Economics, Elsevier, vol. 30(C), pages 60-67.
    4. Adrián O. Ravier & Nicolás Cachanosky, 2015. "Fiscal Policy in Capital-Based Macroeconomics with Idle Resources," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Winter 20), pages 81-95.
    5. repec:pra:mprapa:117955 is not listed on IDEAS
    6. Cameron Harwick, 2022. "Unmixing the metaphors of Austrian capital theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(2), pages 163-176, June.
    7. Nicolás Cachanosky & Alexander W. Salter, 2017. "The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 169-192, June.
    8. William J. Luther & Mark Cohen, 2016. "On the Empirical Relevance of the Mises–Hayek Theory of the Trade Cycle," Advances in Austrian Economics, in: Studies in Austrian Macroeconomics, volume 20, pages 79-103, Emerald Group Publishing Limited.
    9. Andrzej Jędruchniewicz & Dawid Bródka, 2020. "Wahania cen w Polsce w świetle teorii szkoły austriackiej," Bank i Kredyt, Narodowy Bank Polski, vol. 51(6), pages 639-660.
    10. Bryan P. Cutsinger, 2021. "Forced savings and political malinvestment: an application of steve horwitz’s microfoundations and macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 311-322, June.
    11. William J. Luther, 2021. "Two paths forward for Austrian macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 289-297, June.
    12. Miguel Ángel Alonso-Neira & Antonio Sánchez-Bayón, 2024. "Spanish Boom-bust Cycle Within the Euro Area: Credit Expansion, Malinvestments & Recession (2002-2014)," Politická ekonomie, Prague University of Economics and Business, vol. 2024(4), pages 597-625.
    13. Cameron Harwick, 2019. "Bubbles and Broad Monetary Aggregates: Toward a Consensus Approach to Business Cycles," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(2), pages 250-268, April.
    14. Andrzej Jędruchniewicz, 2015. "The Price Structure in the Polish Business Cycle. The Downward Phase," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 40.
    15. Peter Lewin & Nicolás Cachanosky, 2018. "Value and capital: Austrian capital theory, retrospect and Prospect," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 31(1), pages 1-26, March.
    16. Nicolás Cachanosky & Peter Lewin, 2016. "Financial Foundations of Austrian Business Cycle Theory," Advances in Austrian Economics, in: Studies in Austrian Macroeconomics, volume 20, pages 15-44, Emerald Group Publishing Limited.

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    More about this item

    Keywords

    Austrian; Boom; Business cycle; Bust; Federal funds rate; Friedrich A. Hayek; Interest rate; Ludwig von Mises; Macroeconomic fluctuation; Monetary policy; Producer price index; Productivity rule; Stage of process; Taylor rule; B53; E32; E52; E53;
    All these keywords.

    JEL classification:

    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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