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The empirical relevance of the Mises-Hayek theory of the trade cycle

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  • Robert Lester

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  • Jonathan Wolff

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Abstract

Austrian Business Cycle Theory (ABCT), as espoused by Mises ( 1912 , 1949 ) and Hayek ( 1935 ), predicts changes in the economy’s structure of production following an unexpected change in monetary policy. In particular, following a credit expansion the theory predicts that: previously idle resources are drawn into the market, previously employed resources are used more intensively, and prices and quantities of goods in the intermediate stages of production decline relative to the prices and quantities of goods in other stages. To test the theory’s implications we employ stage of process data which classify goods by their distance to final consumption. Using this data we run structural vector autoregressions and isolate each variable’s response to a monetary shock. Consistent with the theory, we find that resource use expands on the intensive and extensive margin. On the other hand, we find little evidence of the relative price and quantity effects predicted by ABCT. Since the relative price effects are the distinguishing aspect of ABCT, we conclude that evidence in favor of the theory is, at best, mixed. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Robert Lester & Jonathan Wolff, 2013. "The empirical relevance of the Mises-Hayek theory of the trade cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 26(4), pages 433-461, December.
  • Handle: RePEc:kap:revaec:v:26:y:2013:i:4:p:433-461
    DOI: 10.1007/s11138-013-0225-9
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. William J. Luther & Mark Cohen, 2016. "On the Empirical Relevance of the Mises–Hayek Theory of the Trade Cycle," Advances in Austrian Economics, in: Steven Horwitz (ed.), Studies in Austrian Macroeconomics, volume 20, pages 79-103, Emerald Publishing Ltd.
    3. Adrián O. Ravier & Nicolás Cachanosky, 2015. "Fiscal Policy in Capital-Based Macroeconomics with Idle Resources," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Winter 20), pages 81-95.
    4. 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.
    5. Steven Horwitz, 2016. "Introduction: Money, Cycles, and Crises in the United States and Canada," Advances in Austrian Economics, in: Steven Horwitz (ed.), Studies in Austrian Macroeconomics, volume 20, pages 1-12, Emerald Publishing Ltd.
    6. Randall G. Holcombe, 2017. "Malinvestment," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 153-167, June.
    7. Peter Lewin & Nicolás Cachanosky, 2018. "Value and capital: Austrian capital theory, retrospect and Prospect," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 31(1), pages 1-26, March.
    8. Nicolás Cachanosky & Peter Lewin, 2016. "Financial Foundations of Austrian Business Cycle Theory," Advances in Austrian Economics, in: Steven Horwitz (ed.), Studies in Austrian Macroeconomics, volume 20, pages 15-44, Emerald Publishing Ltd.
    9. William Luther & Mark Cohen, 2014. "An Empirical Analysis of the Austrian Business Cycle Theory," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(2), pages 153-169, June.

    More about this item

    Keywords

    E32; E52; E53;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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