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The Dynamics of the Interest Rate in Austrian Business Cycle Theory

In: Austrian Theory of Capital and Business Cycle

Author

Listed:
  • Pavel Potuzak

    (Prague University of Economics and Business)

Abstract

This chapter focuses on the dynamics of the interest rate over the business cycle predicted by Austrian theory. It primarily investigates the transmission mechanism that leads to a deviation of the market interest rate from its natural level and subsequent U-shaped behaviour of the market interest rate. Specific approaches by Hayek, Mises, and Rothbard are discussed in detail. This chapter corrects misunderstandings and inconsistencies pointed out by critics of Austrian theory, especially in relation to the Ricardo effect. The evolution of the interest rate in Austrian business cycle theory is then compared with the predictions of mainstream economics models. The last section relaxes the assumption of a one-round increase in the money supply, and describes continuous monetary expansion in detail. The analysis reveals that the market interest rate cannot be permanently reduced below its natural level. This section also explores the main forces that tend to raise the market interest rate.

Suggested Citation

  • Pavel Potuzak, 2022. "The Dynamics of the Interest Rate in Austrian Business Cycle Theory," Springer Books, in: Austrian Theory of Capital and Business Cycle, chapter 0, pages 85-115, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-18728-5_6
    DOI: 10.1007/978-3-031-18728-5_6
    as

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