The Monetary Economics of the Austrian School and the Chicago School

Abstract

To what extent is there complementarity or agreement between Austrian economics and the Chicago school on monetary issues? Both Austrians and Chicagoans would agree that monetary expansion has real effects in the short run, though they emphasize different variables. In the long run, Austrians argue that there is a lasting real effect of monetary expansion—money is not neutral—but Chicagoans too argue that economic activity is less efficient even if people correctly forecast the rate of inflation. Regarding the balance of payments, both the Austrian and Chicago school lead to the conclusion that there can be no balance-of-payments problem. Both are modern versions of the classical price specie flow theory. Perhaps the Austrian approach to monetary economics and the Chicago school approach are more compatible than is commonly thought.