Is the Austrian business cycle theory still relevant?
Anthony M. Carilli
Gregory M. Dempster
Published online: 26 April 2008
Springer Science + Business Media, LLC 2008
Abstract We compile econometric evidence from the latest available time series data
on US savings, consumption, interest rates, and gross domestic product (GDP) to test a
reduced form model of the Austrian Business Cycle Theory (ABCT). We build
indexes that mimic the gap between the market and natural rates of interest and, using
this gap as a proxy for expansionary policy, uncover evidence that changes in reserves
lead to changes in real GDP in the manner predicted by ABCT. In addition, we
establish that the pattern of endogenous changes in output, from positive to negative,
also conforms to the predictions of ABCT. Thus, by incorporating improvements with
regard to data and methods over the few other examples of econometric work in this
area, we provide more distinctive evidence on ABCT relative to competing theories of
the business cycle than has been done previously.
Keywords Business cycles
Natural rate of interest
JEL codes C32
The spirit of the question posed in this article’s title is motivated by the later work of
none other than F. A. Hayek himself (1978, p. 84):
[A]dditions to the quantity of money that in a growing economy are necessary
to secure a stable price level may cause an excess of investment over saving.
But though I was among those who early pointed out this difficulty..., I am
inclined to believe that it is a problem of minor practical significance.
Rev Austrian Econ (2008) 21:271–281
A. M. Carilli (*)
G. M. Dempster
Department of Economics, Hampden-Sydney College, Hampden-Sydney, VA 23943, USA
G. M. Dempster