May, 2016

On the Empirical Relevance of the Mises-Hayek Theory of the Trade Cycle

  • William Luther

    Associate Professor of Economics, Florida Atlantic University
  • Mark Cohen

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Find the article at Emerald Insight.

Lester and Wolff (2013) find little empirical support for the Austrian business cycle theory. According to their analysis, an unexpected monetary shock does not alter the structure of production in a way consistent with the Austrian view. Rather than increasing production in early and late stages relative to middle stages, they find the opposite--a positive monetary shock typically decreses production in early and late stages relative to middle stages. We argue that the measures of production and prices employed by Lester and Wolff (2013) are constructed in such a way that makes them inappropriate for assessing the empirical relevance of the Austrian business cycle theory's unique features. After describing how these measures are constructed and why using ratios of stages is problematic, we use a structural vector autoregression to consider the effects of a monetary shock on each stage of the production process. We show that, with a clearer understanding of what is actually being measured by the stage of process data, the results are consistent with (but not exclusive to) the Austrian view.