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Austrian Business Cycle Theory: Time is Not of the Essence

Austrian Business Cycle Theory: Time is Not of the Essence. William J. Luther J.P. McElyea. Empirical Analysis. Lack of Empirical Relevance Lester and Wolff (2013) Luther and Cohen (2014a) Lack of Data to Consider Empirical Relevance Luther and Cohen (2014b). Objectives:.

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Austrian Business Cycle Theory: Time is Not of the Essence

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  1. Austrian Business Cycle Theory: Time is Not of the Essence William J. Luther J.P. McElyea

  2. Empirical Analysis Lack of Empirical Relevance • Lester and Wolff (2013) • Luther and Cohen (2014a) Lack of Data to Consider Empirical Relevance • Luther and Cohen (2014b)

  3. Objectives: • Re-state Austrian Business Cycle Theory in such a way that is consistent with the historical view but is not subject to the empirical criticism(s) discussed above. • Demonstrate that modified Austrian Business Cycle Theory yields interesting aggregate implications • Note that, to the extent that these implications are not unique, they have much common ground with some Keynesian ideas that Austrians usually reject out of hand

  4. Necessary Components Boom • Monetary misperceptions • Overproduction • Malinvestment Bust • Expectations adjustment • Resource reallocation • Underproduction (relative to former potential)

  5. Simple Model Central Bank: • Targets level of nominal income consistent with given growth rate Producers: • Wish to produce level of real output consistent with given growth rate • Understand CB strategy, but face signal extraction problem

  6. Benchmark Model:Positive Monetary Shock

  7. Austrian Model:Positive Monetary Shock

  8. Benchmark Model:Negative Monetary Shock

  9. Austrian Model:Negative Monetary Shock

  10. Reallocation Costs Physical capital • Revalue • Retool • Relocate Human capital • Revalue • Reeducate • Relocate

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