The Mises-Hayek Business Cycle Theory, Fiat Currencies and Open Economies
36 Pages Posted: 5 Mar 2012 Last revised: 25 Jul 2012
Date Written: July 17, 2012
This paper extends the Mises-Hayek business cycle theory to open economies with fiat currencies. I explore: (1) the problem of domestic versus international monetary policy with fiat currencies in an international setting. (2) How the feedback effects between central banks in the context of an expansionary monetary contributes to extend and transmit a Mises-Hayek business cycle from big economies to small financially integrated economies. I find that a lengthening of the period of production is not the only effect produced on the capital structure, but also a misallocation of capital goods between the production of tradable and non-tradable goods and services and that business cycles can become more severe when there are open economies with fiat currencies.
Keywords: Austrian business cycle theory, small open economies, fiat currencies, interest rate channel, foreign exchange rate channel, monetary policy
JEL Classification: E32, E52, F42
Suggested Citation: Suggested Citation