Intertemporal Capital Substitution and Hayekian Booms
41 Pages Posted: 24 Apr 2016
Date Written: April 22, 2016
Hayek's business cycle theory portrays monetary expansion and monetary contraction with counterintuitive asymmetry. On the one hand, it suggests that they both change relative prices and cause costly reallocations of production factors. At the same time, the theory predicts that while a monetary contraction causes the economic crisis, the monetary expansion comes with the boom. I argue that what I call intertemporal capital substitution in industries close to final consumption explains why there is a boom in spite of the costly reallocations. More specifically, monetary expansion only gradually increases the demand for nonspecific factors of production by industries that are temporally remote from final consumption. Responding to the expected higher cost of nonspecific factors, consumer-goods industries temporarily increase output and depreciate specific durable production factors faster than they planned.
Keywords: Capacity utilization, Hayek, Business cycle, Intertemporal capital substitution
JEL Classification: E14, E22, E32, E43
Suggested Citation: Suggested Citation