Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy?

This article compares the Keynesian, neoclassical and Austrian expla-nations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective, low interest rates are attributed to aging societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were decreased step by step by central banks to stimulate growth. This paralyzed investment and lowered growth in the long term. This study shows that the ability of banks to extend credit ex nihilo and the requirement of time to produce capital goods invalidates the permanent IS identity assumed in the Keynesian theory. Furthermore, it is found that there is no empirical evidence for the hypotheses of a global savings glut and secular stagnation. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.

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Central Banking and Crisis Management from the Perspective of Austrian Business Cycle Theory

The Oxford Handbook of the Economics of Central Banking ◽

10.1093/oxfordhb/9780190626198.013.19 ◽

2019 ◽

pp. 550-584 ◽

Cited By ~ 1

Author(s):

Gunther Schnabl

Keyword(s):

Monetary Policy ◽

Central Bank ◽

Interest Rates ◽

Crisis Management ◽

Growth Dynamics ◽

Central Banking ◽

Business Cycle Theory ◽

Price Inflation ◽

Austrian Business Cycle Theory ◽

Austrian Business Cycle

This chapter analyzes the evolution and effects of central bank crisis management since the mid-1980s based on a Hayek-Mises-Wicksell overinvestment 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 toward zero and a gradual expansion of central bank balance sheets. From a Wicksell-Hayek-Mises 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.

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Lessons from a Review of Money, Banking, and the Business Cycle

Zagreb International Review of Economics and Business ◽

10.2478/zireb-2018-0016 ◽

2018 ◽

Vol 21 (2) ◽

pp. 97-113

Author(s):

Brian P. Simpson

Keyword(s):

Business Cycle ◽

Interest Rates ◽

Austrian Economics ◽

Business Cycle Theory ◽

Austrian Business Cycle Theory ◽

Austrian Business Cycle ◽

The Business Cycle ◽

Rate Of Profit ◽

The Relationship

Abstract Shawn Ritenour provides a review of my two-volume book titled Money, Banking, and the Business Cycle in the winter 2016 issue of The Quarterly Journal of Austrian Economics. This paper constitutes a response to some of the criticisms of the book in his review. In this response, I discuss topics such as the nature of profits, the sustainability of changes in time preference, the role of changes in prices versus changes in spending in the business cycle, the relationship between interest rates and the rate of profit, the nature of fraud, and the nature of value. I also discuss whether the structure of production can be measured using the average period of production. I address other issues raised by Ritenour as well. This discussion sheds light on Austrian business cycle theory and the nature of the business cycle.

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Net Present Value, Duration, and CAPM in Light of Investment Theory: A Comment on Kruk

The Quarterly Journal of Austrian Economics ◽

10.35297/qjae.010097 ◽

2021 ◽

Vol 24 (2) ◽

pp. 348-359

Author(s):

Thomas Hering ◽

Michael Olbrich ◽

David Rapp

Keyword(s):

Business Cycle ◽

Interest Rates ◽

Net Present Value ◽

Business Cycle Theory ◽

Present Value ◽

Austrian Business Cycle Theory ◽

Investment Theory ◽

Austrian Business Cycle ◽

Finance Theory ◽

German Investment

In her paper “Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory” recently published in this journal, Joanna Kruk aims to investigate how artificially low interest rates resulting from central bank intervention distort individual investment appraisals and ultimately result in both entrepreneurial misjudgment and resource-wasting malinvestment, fueling the business cycle. She identifies entrepreneurs’ net present value calculations, supposedly unadjusted for risk, as a major issue and suggests adjusting those calculations for risk via both the duration method and the Capital Asset Pricing Model to mitigate the distorting effects. Her argumentation is, however, trapped in neoclassical reasoning and is adversely affected by several misconceptions of the net present value criterion. This comment seeks to reveal those fallacies and explain how to address uncertainty when using net present value calculations to make those calculations part of the solution rather than part of the problem of entrepreneurial misjudgment. The findings are derived from German investment theory rooted in the Austrian school of thought, meaning that they differ compared to those of neoclassical finance theory.

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New paths in Austrian Macroeconomics

REVISTA PROCESOS DE MERCADO ◽

10.52195/pm.v10i1.204 ◽

2021 ◽

pp. 91-114

Author(s):

William Barnet II ◽

Walter E. Block

Keyword(s):

Interest Rates ◽

Default Risk ◽

Jel Classification ◽

Financial Assets ◽

Business Cycle Theory ◽

Austrian Business Cycle Theory ◽

Nominal Interest Rates ◽

Palabras Clave ◽

Austrian Business Cycle ◽

Interest Margins

This paper makes four points. First, interest rates are not prices; rather they are metrics. Second, there are no markets for «loanable funds» in reality, so attempts to use «the» market for loanable funds either to explain saving-induced growth (or growth induced in other ways) are misleading. Rather, the appropriate concept is markets for financial assets. Third, the primary and most important source of growth is not households’ low or reduced time preferences, but entrepreneurs high or increased profit expectations. Fourth, financial institutions may respond, in part, to a rise in the monetary base by accepting a higher default risk of their assets; i.e., by making riskier loans and buying riskier (financial) assets, in order to maintain nominal interest rates and net interest margins. Key words: Risk, Loanable funds, Financial assets, Austrian business cycle theory. JEL Classification: E32. Resumen: Este artículo desarrolla una versión modificada de la teoría austriaca del ciclo económico en la que el papel protagonista lo juegan las expectativas de beneficio de los empresarios (más que la reducción de la preferencia temporal de los agentes económicos) y la asunción de proyectos empresariales más arriesgado, como principal detonante de las malas inversiones. Palabras clave: Riesgo, Fondos prestables, Activos financieros, Teoría austriaca del ciclo económico. Clasificación JEL: E32.

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Preferencia temporal, múltiples tipos de interés y la teoría austriaca del ciclo económico

REVISTA PROCESOS DE MERCADO ◽

10.52195/pm.v13i1.124 ◽

2021 ◽

pp. 13-63

Author(s):

Alejandro J. Zamora

Keyword(s):

Interest Rate ◽

Business Cycle ◽

Interest Rates ◽

Term Structure ◽

Jel Classification ◽

Business Cycle Theory ◽

Austrian Business Cycle Theory ◽

Preference Theory ◽

Austrian Business Cycle ◽

The One

Traditional expositions of the Austrian Business Cycle Theory (ABCT) rest on the reference to only one – equilibrium – interest rate. This paper, on the one hand, explores the theoretical validity of such a reference and, on the other hand, analyses whether it is essential to the ABCT. To address both issues, we depart from a defense of the recently-disputed Pure Time Preference Theory (PTPT), which purports to explain the cause of the phenomenon of interest and serves as a basis for the ABCT. In the light of our study, in the first place, we reject some of the formulations of the PTPT that lead to erroneous interpretations of this theory and we put forward an enunciation that avoids common confu-sions; secondly, we deny the validity of the reference to only one interest rate as well as its essentiality to the ABCT; finally, we point out the necessity of up-dating the exposition of the ABCT in consonance with the previous conclusions. Key words: Austrian Business Cycle Theory, Business Cycles, Pure Time Prefe-rence Theory, Interest Rates, Term Structure of Interest Rates. JEL Classification: E32, E40, E43, E50, B53. Resumen: Las exposiciones tradicionales de la Teoría Austriaca del Ciclo Eco-nómico (TACE) se apoyan en la referencia a un único tipo de interés de equili-brio. Este artículo, por un lado, explora la cuestión de la validez teórica de dicha referencia y, por otro, estudia si ésta es realmente esencial a la TACE. Para analizar dichas cuestiones, partimos de una defensa de la recientemente cuestionada Teoría de la Preferencia Temporal Pura (TPTP), teoría que preten-de explicar la causa del fenómeno del interés y que sirve de fundamento a la TACE. A la luz de nuestro estudio, en primer lugar, rechazamos ciertas formu-laciones de la TPTP que conducen a interpretaciones erróneas de la misma, proponiendo una enunciación de la teoría que evita confusiones comunes; se-gundo, negamos la validez de la referencia a un tipo de interés único y su carácter esencial a la TACE; por último, notamos la necesidad de actualizar la exposición de la TACE conforme a las conclusiones antedichas. Palabras clave: Teoría Austriaca del Ciclo Económico, Ciclos Económicos, Teo-ría de la Preferencia Temporal Pura, Tipos de Interés, Estructura de Tipos de Interés. Clasificación JEL: E32, E40, E43, E50, B53.

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Over the Cliff: How Brazil's 2004–2016 Business Cycle Became Its Worst Recession in a Century

The Quarterly Journal of Austrian Economics ◽

10.35297/qjae.010027 ◽

2019 ◽

Vol 22 (3) ◽

pp. 383-427

Author(s):

Henrique Maia ◽

Dale Steinreich ◽

Bruno Saboia de Albuquerque

Keyword(s):

Business Cycle ◽

Interest Rates ◽

Adjustment Process ◽

Business Cycle Theory ◽

Austrian Business Cycle Theory ◽

Price Controls ◽

Austrian Business Cycle ◽

National Production ◽

Per Se

This paper analyzes Brazil’s 2004–16 business cycle, which subsumes what is now regarded as the nation’s most severe macroeconomic recession in more than a century. During the steep recession, which stretched over more than two years, national production at one point fell 3.8 percent per annum while the unemployment rate rose from 4.6 to as high as 11.9 percent. This study, after delineating its methodology, examines the behavior of different Brazilian macroeconomic aggregates during the cycle. These aggregates include GDP, the money supply, interest rates, savings, industrial production of higher- and lower-order goods, and inflation. Also examined are the Brazilian government’s interventions that rearranged Brazil’s structure of production and ignited an unsustainable boom, the role of price controls in prolonging economic recovery, and the recovery per se using the theoretical lens of the Austrian-adjustment process. Finally, empirical data from the recent Brazilian cycle will be analyzed in light of the predictions of Austrian business cycle theory (ABCT). The data were found overall to support the theory.

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