Advances in Austrian Economics 20 2016: 45-60
21 Pages Posted: 11 Nov 2014 Last revised: 7 Aug 2016
Date Written: November 10, 2014
Since Hayek’s pioneering work in the 1930’s, the Austrian business cycle theory has been presented as a disequilibrium theory populated by less-than-perfectly rational agents. In contrast, we maintain that (1) the Austrian business cycle theory is consistent with rational expectations and (2) the post-boom adjustment process can be understood in an equilibrium framework. Hence, we offer a new interpretation of the existing theory. In doing so, we also address concerns raised with Garrison’s (2001) diagrammatic approach, wherein the economy moves beyond the production possibilities frontier. Our interpretation might accurately be described as a monetary disequilibrium approach grounded in an implicit general equilibrium framework with positive costs of reallocation.
Keywords: Austrian, boom, business cycle, bust, Friedrich A. Hayek, Ludwig von Mises, macroeconomic fluctuation, structure of production, rational expectations
JEL Classification: B53, E20, E22, E23, E32, E40
Suggested Citation: Suggested Citation
Salter, Alexander William and Luther, William J., The Optimal Austrian Business Cycle Theory (November 10, 2014). Advances in Austrian Economics 20 2016: 45-60. Available at SSRN: https://ssrn.com/abstract=2521947 or http://dx.doi.org/10.2139/ssrn.2521947