At the Root of Economic Fluctuations: Expectations, Preferences and Innovation. Theoretical Framework and Empirical Evidences.

33 Pages Posted: 15 Sep 2015

See all articles by Carmelo Ferlito

Carmelo Ferlito

INTI International University and Colleges; Institute for Democracy and Economic Affairs (IDEAS)

Date Written: September 1, 2015

Abstract

The present paper aim to develop the Austrian Theory of Business Cycle in order to conclude that economic fluctuations are unavoidable. The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit-expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterized by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis. In conclusion we will try to link our theoretical conclusions with the crisis emerged in the Western world in 2007, to test the explanatory power of our theoretical framework.

Keywords: Economic Crises, Business Cycles, Schumpeter, Lachmann, Hayek, Austrian Economics, Expectations.

JEL Classification: B15, B25, E32, D84

Suggested Citation

Ferlito, Carmelo, At the Root of Economic Fluctuations: Expectations, Preferences and Innovation. Theoretical Framework and Empirical Evidences. (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2660146 or http://dx.doi.org/10.2139/ssrn.2660146

Carmelo Ferlito (Contact Author)

INTI International University and Colleges ( email )

No. 3, Jalan SS15/8
Subang Jaya, Selangor 47500
Malaysia

Institute for Democracy and Economic Affairs (IDEAS) ( email )

F4 Taman Tunku, Bukit Tunku
Kuala Lumpur, 50480
Malaysia

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