The Great Recession and its Aftermath from a Monetary Equilibrium Theory Perspective

George Mason University Mercatus Center Working Paper No. 10-63

29 Pages Posted: 5 Dec 2010  

Steven Horwitz

St. Lawrence University

William J. Luther

Kenyon College

Date Written: October 1, 2010

Abstract

Modern macroeconomists in the Austrian tradition can be divided into two groups: Rothbardians and monetary equilibrium (ME) theorists. It is from this latter perspective that we consider the events of the last few years. We argue that the primary source of business fluctuation is monetary disequilibrium. Additionally, we claim that unnecessary intervention in the banking sector distorted incentives, nearly resulting in the collapse of the financial system, and that policies enacted to remedy the recession and financial instability have likely made things worse. Finally, we offer our own prescription to reduce the likelihood that such a scenario occurs again by better ensuring monetary equilibrium and eliminating moral hazard.

Keywords: Austrian Economics, Bailout, Business Cycle, FDIC, Monetary Equilibrium Theory, Monetary Systems, Monetary Policy, Moral Hazard, Nominal Income Targeting, The Great Recession

JEL Classification: B53, E32, E42, E52, E58

Suggested Citation

Horwitz, Steven and Luther, William J., The Great Recession and its Aftermath from a Monetary Equilibrium Theory Perspective (October 1, 2010). George Mason University Mercatus Center Working Paper No. 10-63. Available at SSRN: https://ssrn.com/abstract=1720138 or http://dx.doi.org/10.2139/ssrn.1720138

Steven Horwitz

St. Lawrence University ( email )

One Romoda Drive
Canton, NY 13617
United States
315 229 5731 (Phone)
315 229 5819 (Fax)

HOME PAGE: http://myslu.stlawu.edu/~shorwitz

William J. Luther (Contact Author)

Kenyon College ( email )

Gambier, OH 43022
United States

HOME PAGE: http://www.wluther.com

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