Austrian Business Cycle Theory
|Author:||Mgr. Radek Němeček|
|Year:||2005 - winter|
|Leaders:|| † prof. Ing. Milan Sojka CSc.
|Work type:|| Finance and Banking
|Awards and prizes:|
|Abstract:||This work introduces the Austrian Business Cycle Theory by integrating the R. Garrison's graphical approach with J.G. Hüllsmann's stress on the monetary illusion The Austrian capital-based macroeconomics explains how the market mechanism translates consumers' intertemporal preferences into capital structure of production. Without a monetary illusion there is no reason for general cluster of errors to occur. The explicit attention to intertemporal allocation of resources and attention to the way the new money enters the economy allow for a sharp distinction between economic growth and artificial boom. The underlying consistency (or inconsistency) between consumer preferences and production plans of the business community decides. The current institutional setting (central bank, fiat money and fractional reserve banking) produces only artificial booms. Money supply is being inflated through the fiduciary credit expansion, while the genuine savings are not increased. Thus, the increase of the available loanable funds is merely illusory. This illusion, however, has real impacts. The incremental investments are financed by additional fiduciary credits at artificially cheap interest rate. The capital is being misallocated, in other words wasted, during the boom. The banks cannot of course supply the market for loanable funds with additional fiduciary money indefinitely. Their reluctance to do so even at higher interest rates finally triggers the inevitable bust. During the bust, then, the misinvested resources and erroneous projects started during the boom that cannot be completed are being liquidated and the capital structure is being readjusted. The boom inevitably turns into bust. The boom-bust cycle always results in wealth losses.
The empirical analysis traces the consequences of the monetary illusion created on the market for loanable funds. The business cycle patterns, and economic variables co-movements, are examined mainly through cross-correlations of 4 constructed variables. These variables attempt to show, how the money shocks affect the interest rate term structure expressed by the slope of the yield curve, how the interest rate term structure affects the production structure (the allocation of resources) expressed by the capacity utilization in various stages and finally how the changes in the production structure manifest in the cyclical GDP development expressed as the ratio of actual to potential GDP.
Presented Business Cycle Sequential Scheme sums up in the typical Austrian “causeconsequence” fashion the whole story of boom-bust cycle. The policy conclusion is that the monetary policy can neither create nor sustain an economic growth.