Austrian business cycle theory
- 1Identifies central bank intervention as the cause of business cycles.
- 2Focuses on the manipulation of interest rates as a primary distortion.
- 3Describes the boom phase as a period of malinvestment.
- 4Views the bust as a necessary market correction of previous errors.
The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics.
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Austrian School explanation for economic fluctuations
The school attributes boom-bust cycles to artificial credit expansion by central banks, which distorts interest rates and leads to malinvestment.
The Austrian business cycle theory (ABCT) is an economic framework that attributes the recurring phenomenon of booms and busts to artificial distortions in the credit market. It argues that these cycles are not inherent to free markets but are instead triggered by the actions of central banks.
The Hayekian triangle diagram is used to illustrate the roundaboutness of capital structures.Wikimedia Commons: File:Hayekian_triangle.jpg According to this theory, when central banks intervene to fix interest rates at artificially low levels, they send false signals to investors. This leads to widespread malinvestment, where capital is allocated to unsustainable projects. Eventually, the market must correct these distortions, resulting in a recession or bust as the economy liquidates the unprofitable investments made during the preceding boom.