Risk and Business Cycles: New and Old Austrian Perspectives

By Tyler Cowen | Go to book overview

1

INTRODUCTION

THE PROBLEM
Entrepreneurs seek to match their production to market demands. To the extent that chosen outputs satisfy market demands and earn profits, the plans of consumers and producers are coordinated. How this coordination ever comes about, and why it might sometimes fail to occur, remain central questions for macroeconomics. In this book I shall focus on the coordination of investment and product purchase plans over time. More specifically, I will examine whether intertemporal coordination provides a useful organizing theme for business cycle research. This investigation pursues the research program of the ‘Austrian’ school of economics (e.g., Menger, Mises, Hayek), using modern treatments of risk, finance, and expectations, and drawing upon contemporary methods of empirical and econometric research. I examine how changes in risk, real interest rates, and finance constraints alter the likelihood of intertemporal plan coordination. I will attempt to synthesize modern real business cycle theory, the work of David Lilien and Fischer Black on sectoral shifts, and the older Austrian analyses of monetary and capital theory, with the purpose of constructing an investment-based approach to business cycles in its most plausible form. The questions I address include the following:
1 What risk-return trade-offs do entrepreneurs face in evaluating alternative investments, and how might these trade-offs account for some features of business cycles? Chapter 2 examines this initial question in purely real terms, focusing on intertemporal coordination.
2 Can changes in the nominal money supply create real sectoral shifts? Chapter 3 considers whether real and monetary theories of business cycles can be unified in terms of a general theory of sectoral shifts towards and away from riskier investments.
3 What are the policy implications of intertemporal coordination theories of the business cycle? Chapter 3 considers commodity standards, fixed

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Risk and Business Cycles: New and Old Austrian Perspectives
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • List of Figures and Tables vii
  • Acknowledgements viii
  • 1 - Introduction 1
  • 2 - A Risk-Based Theory in Real Terms 13
  • 3 - A Risk-Based Theory in Monetary Terms 44
  • 4 - Business Cycles Without Rational Expectations: 76
  • 5 - Empirical Evidence 115
  • Bibliography 150
  • Index 167
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