A Suggestion: The Malinvestment Index

Abstract

According to the Austrian Business Cycle Theory, malinvestment is the key concept for understanding the transmission mechanism of the business cycle and the main determinant of its length and amplitude especially during a recession. This paper attempts to construct a malinvestment index to measure the degree of malinvestment in the U.S. economy for the period of 1974:01-2013:12. Four different stage-of-processing price indexes are used for constructing the malinvestment index and tracking the transmission of price changes across successive stages of economic activity in the U.S. economy. The findings of the malinvestment index suggest that the U.S. economy had been in a strong malinvestment period during the pre and post 2008 global crisis. Furthermore, the malinvestment periods all resulted in recessions in the U.S. economy with the exception of the 2008 global crisis. Lastly, the malinvestment index indicates technology-induced growth or secular growth periods.

Keywords: Hayekian Triangle, Malinvestment, Business Cycle

JEL Classification: E31, E32, O40