IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Knowledge shifts and the business cycle: When boom turns to bust

Listed author(s):
  • David Howden

    ()

Informational cascades can be used to augment the existing Austrian business cycle theory. As first-order users of knowledge know the direct causes of a price change, they transmit this knowledge to second-order users through the price system. Banks with direct knowledge of the sources of the fresh liquidity during a credit induced boom have knowledge of the boom's artificial and unsustainable nature. Higher-order users lack this direct knowledge, and hence continue investing largely ignorant of underlying developments. When first-order users of knowledge sense the boom has run its course, they exit the market, sending a strong signal to higher-order knowledge users that the boom has ended – a fragile situation built upon an informational cascade begins collapsing. Simultaneously, the boom is characterized by an influx of capital and knowledge into the financial sector owing to increased profits relative to the real economy stemming from Cantillon effects surrounding the credit injection. As knowledge pertaining to real production has also exited, the bust commences with a misallocated productive structure requiring equilibration to become consistent with consumers' wants. Actions which inhibit this knowledge from returning to the productive structure will unnecessarily lengthen the time to recovery.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1007/s11138-009-0095-3
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Springer & Society for the Development of Austrian Economics in its journal The Review of Austrian Economics.

Volume (Year): 23 (2010)
Issue (Month): 2 (June)
Pages: 165-182

as
in new window

Handle: RePEc:kap:revaec:v:23:y:2010:i:2:p:165-182
DOI: 10.1007/s11138-009-0095-3
Contact details of provider: Web page: http://www.springer.com

Web page: http://www.sdaeonline.org/
Email:


More information through EDIRC

Order Information: Web: http://www.springer.com/economics/public+finance/journal/11138/PS2

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  2. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
  3. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
  4. Anthony Carilli & Gregory Dempster, 2008. "Is the Austrian business cycle theory still relevant?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 271-281, December.
  5. Carilli, Anthony M & Dempster, Gregory M, 2001. "Expectations in Austrian Business Cycle Theory: An Application of the Prisoner's Dilemma," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 14(4), pages 319-330, December.
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
  7. Jacob K. Goeree & Thomas R. Palfrey & Brian W. Rogers & Richard D. McKelvey, 2007. "Self-Correcting Information Cascades," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 733-762.
  8. Koppl, Roger & Mramor, Dusan, 2003. "Big Players in Slovenia," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 16(2-3), pages 253-269, September.
  9. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
  10. Koppl, Roger & Yeager, Leland B., 1996. "Big Players and Herding in Asset Markets: The Case of the Russian Ruble," Explorations in Economic History, Elsevier, vol. 33(3), pages 367-383, July.
  11. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  12. repec:hrv:faseco:33077905 is not listed on IDEAS
  13. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
  14. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  15. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
  16. Horwitz, Steven, 2003. "The Costs of Inflation Revisited," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 16(1), pages 77-95, March.
  17. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
  18. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
  19. Selgin, George & White, Lawrence H, 1996. "In Defense of Fiduciary Media--Or, We Are Not Devo(lutionists), We Are Misesians!," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 9(2), pages 83-107.
  20. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets; A Review," IMF Working Papers 00/48, International Monetary Fund.
  21. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-1145, December.
  22. Israel M. Kirzner, 1984. "Economic Planning and the knowledge Problem," Cato Journal, Cato Journal, Cato Institute, vol. 4(2), pages 407-425, Fall.
  23. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
  24. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  25. Ahmed, Ehsan & Koppl, Roger & Rosser, J. Jr. & White, Mark V., 1997. "Complex bubble persistence in closed-end country funds," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 19-37, January.
  26. Philipp Bagus, 2008. "Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 283-300, December.
  27. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  28. Anne C Jansen & Donald J Mathieson & Barry J. Eichengreen & Laura E. Kodres & Bankim Chadha & Sunil Sharma, 1998. "Hedge Funds and Financial Market Dynamics," IMF Occasional Papers 166, International Monetary Fund.
  29. Wagner, Richard E, 1999. "Austrian Cycle Theory: Saving the Wheat While Discarding the Chaff," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 12(1), pages 65-80.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kap:revaec:v:23:y:2010:i:2:p:165-182. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

or (Rebekah McClure)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.