Business Cycle Theory Research Articles

Beyond Calculation: The Austrian Business Cycle in the Socialist Commonwealth

This paper extends Austrian business cycle theory to the command economy and demonstrates that Mises’s socialist commonwealth would not be free from Rothbardian error cycles, which J. Guido Hülsmann has argued must originate in “institutions in which the error of many persons is inherent.” Booms and busts are shown to be unavoidable under socialism because (1) the central planner’s incomplete understanding of the opportunity costs associated with any given rate of growth would result in growth targets that are unsustainably high and (2) the planner would be blind to the resulting imbalances until they became sufficiently severe to become “visible” in the statistical data that form her only picture of the world. In this case, Hülsmann’s “erroneous institution” is central planning, which misidentifies the state’s image of the economy with the totality of economic reality.

Forced Savings and Political Malinvestment

Steven Horwitz's book, Micro-foundations and Macroeconomics has been at the center of the post-crisis revival of Austrian business cycle theory. Much of the work that has been done on this topic has either extended or refined Horwitz's framework. This paper's aim is more modest. In it, I apply Horwitz's framework to the Confederate monetary experience during the U.S. Civil War. While there was an excess supply of money, I do not find any evidence that it generated a credit boom - quite the contrary. That said, there is evidence of forced savings, which the state and Confederate governments used to fund large-scale investment projects, among other things. While this is not malinvestment in the traditional sense, I argue that allocating credit in response to political incentives is unlikely to result in a sustainable capital structure. This finding points to the need to incorporate the notions of forced savings and malinvestment into a broader political-economy perspective.

Toward Reasonable Capitalism: The Role of John R. Commons’s Price and Business Cycle Theories

John R. Commons thought that prices should be stable and that the law of supply and demand should be controlled by the power of the state through patent law and by protecting bargaining equality. Commons also thought that prices should be stabilized by macro monetary policy. These means would allow the realization of a “reasonable price.” Commons called the objective and measurable value in money, which is determined by a court ruling, “reasonable value.” Analysis of Commons’s price and business cycle theories point toward the realization of both “reasonable price” and “reasonable value” and toward “reasonable capitalism” that can replace banker capitalism.

Book Review: Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly

John Quiggin's _Economics in Two Lessons_ alleges a failing in Henry Hazlitt's _Economics in One Lesson_: the absence of a discussion of market failure. Quiggin's adherence to the doctrine of neoclassical equilibrium misses an important fact: the absence of a neoclassical equilibrium is not a recession, but the ordinary course of the economy. _Economics in Two Lessons_ reveals a misunderstanding of Austrian business cycle theory, and the second lesson to a large extent consists of casting Hazlitt's lesson aside.

The housing business cycle of local public finance: empirical evidence from Taiwan

ABSTRACT This paper attempts to investigate the association between local public finance and housing market. We deal with the potential endogeneity problem by utilizing two-stage-least-square (2SLS) model. Our empirical results suggest that (1) the average housing price is positively and significantly associated with local revenue. (2) The average housing price is positively associated with local expenditure, though not significantly. (3) The rise of average housing price is also proven to reduce the local deficit significantly. (4) While the flypaper effect is obvious in Taiwan’s local expenditure, the opportunistic political business cycle theory is not so significant.

A Markov‐switching analysis of Nigeria's business cycles: Are election cycles important?

AbstractThe study examines Nigeria's business cycles between October 1998 and October 2017 and ascertains the importance of general elections cycles in engendering cyclical fluctuations in different measures of business cycles.A framework based on political business cycles theory was estimated with a dynamic Markov‐switching regression technique. The study finds that election cycles are adequate in predicting cycles in food prices, non‐farm prices, exports, and imports in Nigeria while a significant effect of election cycles on the stock market, general price level, and exchange rate could not be established. The study concludes that cycles in food, non‐farm prices, imports, and exports can be predicted by future general elections while re‐election seeking behaviour of politicians lacks the power to influence stock market performance and exchange rate in Nigeria. Hence, artificial business cycles that result primarily from politicians manipulating certain fiscal tools targeted at stimulating the economy only to increase the re‐election chances could be minimized if monetary and fiscal institutions are strong, effective, and truly independent. This will ensure that policies are not manipulated between elections by politicians but are well targeted at achieving a set of long‐term developmental goals.

Modern Monetary Theory: An Austrian Interpretation of Recrudescent Keynesianism

Modern monetary theory (MMT) argues that governments can never go bankrupt because they have the power to print money to finance budget deficits. Consequently, debt monetization can achieve virtually any government objective desired. This paper uses Austrian economics to argue that MMT suffers from the flaws of all forms of Keynesian economics, particularly the original version of the 1930s and 1940s. MMT fails to understand capital-based macroeconomics and how government policy affects the temporal structure of production. MMT also neglects the importance of profit and loss accounting compared to government allocation of resources. The Austrian school argues that traditional New Keynesian countercyclical monetary policy results in a credit-induced boom and bust (Austrian business cycle theory) by injecting new money into private sector loans through the banking sector. However, Austrian analysis demonstrates that MMT’s monetary policy to monetize government deficits and increase the money supply through government spending will instead lead to secular economic stagnation and a stunted capital structure. Overall, the policy prescriptions of MMT are far more dangerous than traditional New Keynesian policies.

The upper turning point in the Austrian business cycle theory

This paper defends the relevance of Austrian Business Cycle theory (ABCT) within a fiat money regime, by providing an answer to whether a constant rate of credit expansion necessarily leads to a boom-bust cycle. We claim that this scenario has two potential outcomes, (1) a change in money demand brings the economy back towards equilibrium or (2) the economy will shift to a sub-optimal but still sustainable path. We identify capital heterogeneity effects and the Ricardo effect as distinctly Austrian explanations for an upper turning point, even in a fiat money regime.

The role of fractional-reserve banking in amplifying credit booms: Evidence from panel data

I use panel data on 20 countries to analyze the links between savings (defined as time deposits and savings accounts) and credit extended by banks. Credit growth is not related to prior changes in savings, at least not in the short run. This result indicates that the intuition behind the loanable funds theory does not work well in explaining macroeconomic dynamics. I also find that the share of savings in total deposits decreases during credit booms. The existence of such an effect is predicted by the Austrian business cycle theory. Based on the above results, I infer that an important disadvantage of fractional-reserve banking is a tendency for the market interest rate to diverge from the natural interest rate.

Unmixing the Metaphors of Austrian Capital Theory

A complement of metaphors inherited from the classical era has held back progress in Austrian capital theory (ACT). In particular, the attachment to circulating capital as the paradigmatic capital good, largely motivated by the business cycle theory, has locked ACT into a nonoperational point-output model of production. This paper draws out a distinct flow-output approach from work by Lachmann, Lewin, and Cachanosky, contrasts its associated metaphors and paradigms with those of the canonical Hayek-Garrison model, and argues that the former has the potential to bolster both the analytical coherence and the empirical relevance of ACT that it has so far found elusive. By focusing on the investment project rather than the capital good as the object of planmaking, the flow-output approach affirms the core appeal of ACT – a heterogeneous capital structure and a market process approach – by declaring independence from the business cycle theory.

Mexican competitive advantage in NAFTA: a case of social dumping A view from the automotive industry

In the midst of the NAFTA renegotiations, the Mexican Automotive Industry (MAI) has drawn much attention. Gaining a progressive share of markets, jobs and portfolio investments within the region and accounting for the entire US trade deficit, the MAI is one of the most critical pieces in the way of a new NAFTA. In addition, the US President, Donald Trump, has criticised it as an example of the shortcomings of the old agreement. These facts call for a better assessment of the MAI's sources of competitive advantage. This paper builds on business cycle theories and socio-economic perspectives of market embedded institutions to provide an additional lens with which to study the MAI and NAFTA. It presents theory and evidence to demonstrate that the MAI position rests on social dumping policies that underpin illegitimate sources of competitive advantage. It then discusses the issues at stake in the current NAFTA renegotiations.

Mexican competitive advantage in NAFTA: a case of social dumping A view from the automotive industry

In the midst of the NAFTA renegotiations, the Mexican Automotive Industry (MAI) has drawn much attention. Gaining a progressive share of markets, jobs and portfolio investments within the region and accounting for the entire US trade deficit, the MAI is one of the most critical pieces in the way of a new NAFTA. In addition, the US President, Donald Trump, has criticised it as an example of the shortcomings of the old agreement. These facts call for a better assessment of the MAI's sources of competitive advantage. This paper builds on business cycle theories and socio-economic perspectives of market embedded institutions to provide an additional lens with which to study the MAI and NAFTA. It presents theory and evidence to demonstrate that the MAI position rests on social dumping policies that underpin illegitimate sources of competitive advantage. It then discusses the issues at stake in the current NAFTA renegotiations.

Assessing commodity price risks and terms of trade exposures in emerging and developing countries

This paper provides novel evidence on commodity exposure (impacts of commodity price and terms of trade fluctuations) amongst 46 emerging and developing countries (EMDCs) in Africa, Asia and the Latin American and Caribbean (LAC) region. We focus on the exposures of six macroeconomic variables to the commodity prices and terms of trade, based on the real business cycle (RBC) theory. Our empirical results indicate that, overall, about 10% of the macroeconomic variation amongst the EMDCs is due to commodity market-related exposures. The Asian and LAC economies are especially sensitive to changes in commodity prices. The changes in the prices of world trade have an imminent impact on non-commodity exporting EMDCs. In sum, our results indicate that the commodity market exposure is not unanimous across countries, amongst regions or between measures of exposure.

Революция платформ с позиций австрийской теории экономических циклов

Революция платформ с позиций австрийской теории экономических циклов

Negative Inflation Targeting: A Proposal of a Non-Distortionary Monetary Policy

This paper aims to propose a non-distortionary monetary policy objective consistent with the Austrian business cycle theory. Since the price level should fall in the growing economy in the Hayekian framework, introduction of a negative inflation target combined with the Taylor rule is suggested as a non-distortionary monetary policy. To keep the money stream stable, the optimal inflation target would be equal to the opposite of the growth rate of the economy. Such policy should lead to the smoothing of the business cycle path since monetary policy could be less activist compared to the current state of the positive inflation target. Possible criticisms of this suggestion are anticipated and addressed in this paper.

Over the Cliff: How Brazil's 2004–2016 Business Cycle Became Its Worst Recession in a Century

This paper analyzes Brazil’s 2004–16 business cycle, which subsumes what is now regarded as the nation’s most severe macroeconomic recession in more than a century. During the steep recession, which stretched over more than two years, national production at one point fell 3.8 percent per annum while the unemployment rate rose from 4.6 to as high as 11.9 percent. This study, after delineating its methodology, examines the behavior of different Brazilian macroeconomic aggregates during the cycle. These aggregates include GDP, the money supply, interest rates, savings, industrial production of higher- and lower-order goods, and inflation. Also examined are the Brazilian government’s interventions that rearranged Brazil’s structure of production and ignited an unsustainable boom, the role of price controls in prolonging economic recovery, and the recovery per se using the theoretical lens of the Austrian-adjustment process. Finally, empirical data from the recent Brazilian cycle will be analyzed in light of the predictions of Austrian business cycle theory (ABCT). The data were found overall to support the theory.

Relationship between Oil Prices and Economic Growth in GCC Countries

This study explores the relations between Oil Prices (OP) and Gross Domestic Product (GDP) per capita in Gulf Cooperation Council (GCC) countries using the asymmetric causality test for the period of 1996-2018. The results of the standard bootstrap causality test reveal bidirectional causality between the OP and the GDP per capita in Qatar and Saudi Arabia. The results of asymmetric causality tests are different for some countries, which demonstrate the unidirectional causality running from OP+ to GDP+ in Oman and Saudi Arabia. Whereas, the bidirectional causality exists between the GDP- and OP- in Kuwait and Oman and unidirectional causality exists between the OP- and the GDP- per capita in Bahrain, Qatar, and UAE. The results support the Real Business Cycle Theory (RBC Theory), which states that external positive or negative shocks have significant impact on GDP per capita through consumption and investment channels. GCC countries should channelize the huge revenues towards other private sectors, which will create more prospects for the GDP and will provide substitution in case of arising any crisis. In addition, the GCC countries must diversify their economic activities since the OP are quite volatile and uncertain and the revenues of these countries are dependent on the OP to a large extent. Sustainable development can be achieved through a balanced path between government expenditures and future savings.

The Upper Turning Point in the Austrian Business Cycle Theory

This paper studies a scenario - one of the six problems with Austrian Business Cycle theory raised by Hummel (1979) - that the ABCT literature has paid little attention. Will a constant rate of credit expansion necessarily lead to a boom-bust cycle? We conclude that this scenario has two potential outcomes, (1) a change in money demand brings the economy back towards equilibrium or (2) the economy will shift to sub-optimal but still sustainable path. We identify capital heterogeneity effects and the Ricardo effect as distinctly Austrian explanations for an upper turning point, even in a fiat money regime.

Some Aspects of Business Cycle Theory

The presented study examines the economic nature of cycles and its key component — crisis — the initial phase of a business cycle.Aim. The study aims to determine the effect of business cycles and their alternation on the Russian economy.Tasks. The authors examine models that explain the functioning of medium-term business cycles; identify the major causes of financial and economic crises at the turn of the cycle; determine the consequences of modern business cycles for Russia in terms of its macroeconomic indicators.Methods. This study uses general scientific methods of cognition to examine the concept of business cycles and determine the causes and consequences of modern crises for the country’s economy.Results. Among the existing types of business cycles there are medium-term cycles, a global turn in which over the last three decades is caused primarily by the problems in the financial sector of the US economy. A comparative analysis of the current medium-term cycle and the previous one makes it possible to determine their quantitative and qualitative implications for the Russian economy. The 2008–2009 turn in business cycles pointed at the low efficiency of the Russian economic policy at the time, which had achieved great results during the previous cycle. The average gross domestic product (GDP) growth rate in Russia decreased not only in comparison between the two business cycles, but also in comparison with the global GDP growth rates. The modern world is currently in the final phase of the business cycle after a sustained growth, while the state of the Russian economy has long been characterized by stagnation in many industries, which poses a threat to the economic stability of the state on the verge of a new crisis.Conclusions. Examination of the concepts of business cycles as recurring periods of fluctuating business activity makes it possible not only to identify external and internal causes of economic instability during a cycle and at the turn of a cycle, but also to analyze the state of the economy in different phases of a cycle to improve the efficiency of the national economic policy.

Demand for Money and Hayekian Triangles

The trigger of the Austrian (Hayekian) business cycle theory lies in the money-supply shock that deflects the market rate of interest from the natural level. Hayek (1935) developed a simple graphical tool to plot dynamics of the capital structure after this shock. Freezing the money supply is hence the early Hayek (1928) recommendation for monetary policy to prevent business cycles. Later, Hayek (1935) realised that changes in the velocity of circulation may have similar effects as the money-supply shocks. As a result, Hayek recommended to stabilize MV in the equation of exchange. However, he had never extended his graphical tool, the Hayek triangle, to describe dynamics of the capital structure after the shocks to the demand for money (i.e. velocity shocks). This paper tries to fill this gap. Changes in the money demand are plotted in Hayekian triangles. Since the nature of the demand for money is not unambiguously defined, the paper discusses whether real money balances that people hold reflect their demand for present goods or for future goods. The impact on the Hayek triangle then depends on how greater (lower) demand for money affects the flow of income; i.e. whether people (dis)hoard part of their income normally allocated on (real) consumption goods or on saving. This re-allocation then critically affects subsequent dynamics of the capital structure and the business cycle.