Abstract
The recent flourishing of New Classical economics, and especially its Equilibrium Business Cycle Theory (EBCT), has given a fresh hearing to the Old-but still developing-Austrian Business Cycle Theory (ABCT). While the New and the Old differ radically in both substance and methods, they exhibit a certain formal congruency that has captured the attention of both schools. The formal similarities between EBCT and ABCT invites a point-bypoint comparison, but the comparison itself dramatizes differences between the two views in a way that adds to the integrity and plausibility of the Austrian theory. In modern macroeconomic literature, the label EBCT is applied sometimes so broadly as to include New Keynesian as well as New Classical constructions and sometimes so narrowly as to preclude the very developments within the New Classical school that are most closely related to ABCT. So-called Real Business Cycle Theory, in which cyclical movements of macroeconomic variables are characterized by both market clearing and Pareto optimality, is sometimes designated as the only true equilibrium construction. The comparison of New Classical and Old Austrian theories is best facilitated by letting EBCT refer to those theories in which (a) individuals make the best use of the information available to them and (b) an informational deficiency temporarily masks the intementions of the monetary authority. As exposited by Robert Lucas (1981), Robert Barro (1981) and others, EBCT so conceived accounts for business cycles in terms of the actions of market participants confronted with what has come to be known as a signal-extraction problem. Difficulties in
Published Version
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