New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis
AbstractThis article develops the relationships among real business cycle (RBC) theory, Austrian business cycle (ABC) theory, and Minsky's financial instability hypothesis (FIH). In RBC models, recessions are caused on the supply side by random technology shocks which are independent of monetary policy. However, in ABC models, credit expansion results in negative productivity shocks, as the marginal return on investment is lowered and the production structure is extended by commitment to more capital-intensive activities. Thus, ABC theory helps resolve several problems with RBC theory. The FIH describes a process of endogenous overleveraging which unsustainably overvalues assets and exposes the financial sector to greater risk. This paper argues that the overleveraging described by the FIH is compatible with the unsustainable expansion of production described in ABC theory, and further argues that credit expansion would both provide additional funds to finance overleveraging, as well as encourage the process by making it cheaper with lower interest rates.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 86 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/jebo
Production structure; Hayekian triangle; Real business cycle model; Financial instability hypothesis;
Find related papers by JEL classification:
- B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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