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A financial framework for understanding macroeconomic cycles: The structure of production is relevant

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  • Peter Lewin
  • Nicolas Cachanosky

Abstract

Purpose - A comprehensive understanding business cycles needs to account not only for the allocation of resources over time but also for resource allocation across industries at any point in time. But to properly understand how these “time-distortions” take place and how the price mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production is required. The authors use insights provided by Macaulay’s duration and Hicks’s average period to show that financial duration and related concepts have a direct connection to macroeconomic stability. Design/methodology/approach - This study uses a theoretical and conceptual approach. It first presents the connection between average period of production and financial duration and then compares and applies this to macroeconomic business cycle theories. Findings - This study points to important implications for macroeconomic policy. It not only claims that a low interest rate contributes to the creation of asset bubbles but also shows the market mechanism through which the real sector is affected. The application of financial concepts to macroeconomic cycles shows the price mechanism through which resources are allocated across industries. Originality/value - The financial approach we offer to business cycles is fairly unexplored. As such, this paper offers a novel conceptual and theoretical framework for business cycles.

Suggested Citation

  • Peter Lewin & Nicolas Cachanosky, 2016. "A financial framework for understanding macroeconomic cycles: The structure of production is relevant," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 8(2), pages 268-280, May.
  • Handle: RePEc:eme:jfeppp:v:8:y:2016:i:2:p:268-280
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    Cited by:

    1. repec:jpe:journl:1475 is not listed on IDEAS
    2. repec:jpe:journl:1477 is not listed on IDEAS
    3. Yang, David, 2018. "Has the arrival of Amazon altered the market structure for consumer electronic goods in Australia?," MPRA Paper 88153, University Library of Munich, Germany.

    More about this item

    Keywords

    Cycles; Financial markets and the macroeconomy; Macroeconomics and monetary economics; Austrian economics; B53; E23; E30;

    JEL classification:

    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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