Austrian Business Cycle Theory : A Modern Appraisal

Austrian business cycle theory (ABCT) is a body of hypotheses embodying particularly Austrian insights and assumptions. The canonical variant associated with Mises (1934, 1963) and Hayek (1933, 1935) is particularly well-suited to the Great Depression. However, it is an inadequate account of the recent US recession and financial crisis. This paper develops a suitable ABCT variant that explicitly incorporates not only the economy's time structure of production but also (1) its structure of consumption and (2) its risk structure. The continuous input-continuous output nature of the housing market is highlighted, as well as the Treasury and Federal Reserve's roles in externalizing the risk associated with GSEs' debt. This paper then extends Garrison's (2001) graphical framework to illustrate this ABCT variant