A Financial Framework for Understanding Macroeconomic Cycles: The Time Structure of Production is Relevant
2016. Journal of Financial Economic Policy. Vol. 8, No. 2.
33 Pages Posted: 15 Feb 2017 Last revised: 25 Apr 2019
Date Written: June 3, 2014
A comprehensive understanding business-cycles needs to account not only for the allocation of resources over time, but also for resource allocation across industries at any point in time. Intertemporal disequilibrium has been a common theme of many theories of the business-cycle. But to properly understand how these “time-distortions” take place and how the price-mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production, is required. The insights provided by Macaulay’s duration and Hicks’s Average Period do this. We show that financial duration and related concepts have a direct connection to macroeconomic stability. By doing this we point to important implications for macroeconomic policy. We claim not only that a low interest rate contributes to the creation of asset bubbles, we show also the market mechanism through which the real sector is affected. We argue that to accept that duration matters for resource allocation is to accept the core of the Austrian Theory of the Business Cycle (ABCT) and, therefore, that to reject the ABCT core thesis suggests also rejecting the importance of duration for resource allocation.
Keywords: Macaulay Duration, Modified Duration, Business Cycles, Average Period of Production, Roundaboutness
JEL Classification: B53, E23, E30
Suggested Citation: Suggested Citation