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

See all articles by Peter Lewin

Peter Lewin

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Nicolas Cachanosky

Metropolitan State University of Denver; American Institute for Economic Research

Date Written: June 3, 2014

Abstract

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

Lewin, Peter and Cachanosky, Nicolas, A Financial Framework for Understanding Macroeconomic Cycles: The Time Structure of Production is Relevant (June 3, 2014). 2016. Journal of Financial Economic Policy. Vol. 8, No. 2.. Available at SSRN: https://ssrn.com/abstract=2443591 or http://dx.doi.org/10.2139/ssrn.2443591

Peter Lewin

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Nicolas Cachanosky (Contact Author)

Metropolitan State University of Denver ( email )

Student Success Building
890 Auraria Pkwy #310
Denver, CO 80217
United States

HOME PAGE: http://www.ncachanosky.edu

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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