Central Banking and Crisis Management from the Perspective of Austrian Business Cycle Theory
42 Pages Posted: 15 Dec 2016
Date Written: November 15, 2016
The paper analyses the evolvement and effects of central bank crisis management since the mid 1980s based on a Hayek-Mises-Wicksell over-investment framework. It is shown that, given that the traditional transmission mechanism between monetary policy and consumer price inflation has collapsed, asymmetric monetary policy crisis management implies a convergence of interest rates towards zero and a gradual expansion of central bank balance sheets. From a Hayek-Mises-Wicksell perspective asymmetric central bank crisis management has contributed to financial market bubbles, decreasing marginal efficiency of investment, increasing income inequality and declining growth dynamics. The economic policy implication is a slow but decisive exit from ultra-expansionary monetary policies.
Keywords: Hayek, Mises, Wicksell, monetary overinvestment theory, asymmetric monetary policy, financial crisis, Goodhart’s Law, marginal productivity of investment, secular stagnation
JEL Classification: E520, E580, F420, E630
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