Monetary policy and business cycles: a post-crisis research agenda for Austrian economics

In response to the financial crisis, the Federal Reserve’s operating framework shifted to one where changes in the central bank’s balance sheet had less of an effect on the stance of monetary policy. This change was brought about by Fed officials’ decision to pay interest on excess reserves at a rate higher than comparable market rates. In consequence, banks opted to hold excess reserves rather than lend them, thereby attenuating the mechanism through which changes in the monetary base spill over into the market for loanable funds. Despite a resurgence of interest in Austrian business cycle theory since the financial crisis, there has been little analysis of how the Federal Reserve’s post-crisis operating framework affects Austrian business cycle theory and the concept of malinvestment. The purpose of this chapter is to explore the link between this framework and the Austrian views of the business cycle.