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New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis

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  • Mulligan, Robert F.

Abstract

This 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.

Suggested Citation

  • Mulligan, Robert F., 2013. "New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 67-77.
    • Handle: RePEc:eee:jeborg:v:86:y:2013:i:c:p:67-77
    DOI: 10.1016/j.jebo.2012.12.027
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    Cited by:

    1. Cachanosky, Nicolás & Lewin, Peter, 2016. "An empirical application of the EVA® framework to business cycles," Review of Financial Economics, Elsevier, vol. 30(C), pages 60-67.
    2. repec:jpe:journl:1228 is not listed on IDEAS
    3. Kundan Kumar & Rajendra Narayan Paramanik & Anoop S. Kumar, 2023. "Nexus among Indian business cycle–financial cycle and Policy Uncertainty Index," SN Business & Economics, Springer, vol. 3(12), pages 1-19, December.
    4. Victor I. Espinosa, 2024. "The perils of lax economic policy: The case of Chile during the COVID-19 pandemic," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 37(3), pages 293-310, September.
    5. Mulligan, Robert F., 2017. "The multifractal character of capacity utilization over the business cycle: An application of Hurst signature analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 147-152.
    6. Nicolás Cachanosky & Alexander W. Salter, 2017. "The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 169-192, June.
    7. Mulligan, Robert F., 2014. "Multifractality of sectoral price indices: Hurst signature analysis of Cantillon effects in disequilibrium factor markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 403(C), pages 252-264.

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    Keywords

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    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; Modern Monetary Theory
    • 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, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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