The Austrian Theory of Business Cycles: Old Lessons for Modern Economic Policy?

16 Pages Posted: 30 Jan 2006

Date Written: January 2002

Abstract

This paper reviews the Austrian theory of the business cycle first proposed by Friedrich Hayek in the 1920s. His theory claimed that credit creation by monetary authorities would push investment beyond society`s long-term willingness to save, creating a mismatch between supply and demand that would inevitably cause recession. The theory argued, moreover, that expansionary policies in recession could generally only postpone the necessary structural adjustment, making the subsequent correction more severe. Modern followers of this theory see Austrian features in a number of recent business cycles, including Japan in the 1980s and 1990s, and the more recent U.S. slowdown.

Keywords: Austrian School, Hayek, Friedrich (1899-1992), business cycles, monetary policy

JEL Classification: B53, E32, E50

Suggested Citation

Oppers, Stefan Erik, The Austrian Theory of Business Cycles: Old Lessons for Modern Economic Policy? (January 2002). IMF Working Paper No. 02/2, Available at SSRN: https://ssrn.com/abstract=879306

Stefan Erik Oppers (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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