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

Ball State University; Ball State 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

Ball State University ( email )

Department of Economics
Ball State University
Muncie, IN 47306
United States
765 285 5384 (Phone)

Ball State University ( email )

Muncie, IN 47306-0340
United States

William J. Luther (Contact Author)

Kenyon College ( email )

Gambier, OH 43022
United States

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

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