Business Cycle


Austrian Business Cycle Theory - Reactions of economists and policymakers



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Austrian Business Cycle Theory - Reactions of economists and policymakers

  • When, in 1937, the League of Nations examined the causes of and solutions to business cycles, the Austrian business cycle theory alongside the Keynesian and Marxian theory were the three main theories examined.Prosperity and Depression (1937)



Austrian Business Cycle Theory - Similar theories

  • The Austrian theory is considered one of the precursors to the modern credit cycle theory, which is emphasized by Post-Keynesian economics|Post-Keynesian economists, economists at the Bank for International Settlements



Austrian Business Cycle Theory - Similar theories

  • In 2003 Barry Eichengreen laid out a credit boom theory as a cycle in which loans increase as the economy expands, particularly where regulation is weak, and through these loans money supply increases



Austrian Business Cycle Theory - Similar theories

  • In addition, White believes that the Austrian explanation of the business cycle might be relevant once again in an environment of excessively low interest rates



Austrian Business Cycle Theory - Related policy proposals

  • Cochran http://financialservices.house.gov/uploadedfiles/hhrg-112-ba19-wstate-jcochran-20120628.pdf have testified before Congressional Committee about the beneficial results of moving to either a free banking system or a free Full-reserve banking system based on commodity money based on insights from Austrian business cycle theory.



Austrian Business Cycle Theory - Theoretical objections

  • Austrian economist Sean Rosenthal (economist)|Sean Rosenthal argues that widespread knowledge of the Austrian business cycle theory increases the amount of malinvestment during periods of artificially low interest rates.



Austrian Business Cycle Theory - Theoretical objections

  • Austrian business cycle theory postulates that business cycles are caused by the misallocation of resources from consumption to investment during booms, and out of investment during busts



Austrian Business Cycle Theory - Theoretical objections

  • Economist Jeffery Hummel is critical of Hayek's explanation of labor asymmetry in booms and busts. He argues that Hayek makes peculiar assumptions about demand curves for labor in his explanation of how a decrease in investment spending creates unemployment. He also argues that the labor asymmetry can be explained in terms of a change in real wages, but this explanation fails to explain the business cycle in terms of resource allocation.



Austrian Business Cycle Theory - Empirical objections

  • He argues that this casts doubt on the notion that recessions are caused by a reallocation of resources from industrial production to consumption, since he argues that the Austrian business cycle theory implies that net investment should be below zero during recessions



Austrian Business Cycle Theory - Empirical objections

  • In 1969, economist Milton Friedman, after examining the history of business cycles in the U.S., concluded that The Hayek–Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false. He analyzed the issue using newer data in 1993, and again reached the same conclusion.



Austrian Business Cycle Theory - Empirical objections

  • Economist Jesus Huerta de Soto claims that Friedman has not proven his conclusion because he focuses on the contraction of GDP being as high as the previous contraction, but that the theory establishes a correlation between credit expansion, microeconomic malinvestment and recession, not between economic expansion and recession, both of which are measured by an aggregate (GDP) and that the empirical record shows strong correlation.p. 495 (de Soto 1998)



Austrian Business Cycle Theory - Empirical objections

  • Referring to Friedman's discussion of the business cycle, Austrian economist Roger Garrison stated, Friedman's empirical findings are broadly consistent with both Monetarist and Austrian views, and goes on to argue that although Friedman's model describes the economy's performance at the highest level of aggregation; Austrian theory offers an insightful account of the market process that might underlie those aggregates.Milton Friedman, The 'Plucking Model' of Business Fluctuations Revisited Economic Inquiry April, 1993



Economic cycle - Spectral analysis of business cycles

  • Korotayev Tsirel also detected shorter business cycles, dating the Kuznets to about 17 years and calling it the third sub-harmonic of the Kondratiev, meaning that there are three Kuznets cycles per Kondratiev.



Economic cycle - Real business cycle theory

  • There were great increases in Productivity improving technologies (historical)|productivity, industrial production and real per capita product throughout period from 1870 to 1890 that included the Long Depression and two other recessions






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