On the Empirical Relevance of the Mises-Hayek Theory of the Trade Cycle

29 Pages Posted: 27 Oct 2013 Last revised: 8 Apr 2014

William J. Luther

Kenyon College

Mark Cohen

Kenyon College

Date Written: April 7, 2014

Abstract

Lester and Wolff (2013) find little empirical support for the Austrian business cycle theory. According to their analysis, an unexpected monetary shock does not alter the structure of production in a way consistent with the Austrian view. Rather than increasing production in early and late stages relative to middle stages, they find the opposite — a positive monetary shock typically decreases production in early and late stages relative to middle stages. We argue that the measures of production and prices employed by Lester and Wolff (2013) are constructed in such a way that makes them inappropriate for assessing the empirical relevance of the Austrian business cycle theory. After describing how these measures are constructed and why it is problematic for our purposes, we use a structural vector autoregression to consider the effects of a monetary shock on each stage of the production process. We show that, with a clearer understanding of what is actually being measured by the stage of process data, the results are consistent with (but not exclusive to) the Austrian view.

Keywords: Austrian, boom, business cycle, bust, Friedrich A. Hayek, Ludwig von Mises, macroeconomic fluctuation, stage of process, structure of production

JEL Classification: B53, E20, E22, E23, E32, E40

Suggested Citation

Luther, William J. and Cohen, Mark, On the Empirical Relevance of the Mises-Hayek Theory of the Trade Cycle (April 7, 2014). Available at SSRN: https://ssrn.com/abstract=2345751 or http://dx.doi.org/10.2139/ssrn.2345751

William J. Luther (Contact Author)

Kenyon College ( email )

Gambier, OH 43022
United States

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

Mark Cohen

Kenyon College ( email )

Gambier, OH 43022
United States

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