The role of central banks and monetary policy in modern economies is a highly controversial topic. This paper attempts to show the relationship between monetary policy and the development of economic crisis, especially the recent Subprime Crisis in the USA. For this purpose the first part of the paper examines the Austrian theory of the business cycle and its illustration, the capital-based macroeconomics model. According to the Austrian theory artificially low interest-rates are responsible for misallocations of resources within the in-tertemporal capital structure and, consequently, reoccurring fluctuations within the eco-nomic system.
The second part of the paper applies the Austrian theory of the business cycle to the Sub-prime Crisis and investigates the role of the Federal Reserve System for the development of the crisis.
Ultimately, this paper states that expansionary monetary policy and flawed government regulations were the cause for unbalanced changes in the American structure of production and the recession.
Table of Contents
1 Introduction
2 The Austrian Theory of the Business Cycle
2.1 Capital-based macroeconomics
2.1.1 The market for loanable funds
2.1.2 The production possibilities frontier (PPF)
2.1.3 Stages of production
2.1.4 Capital-based macroeconomics model
2.2 The Business Cycle
2.2.1 Monetary expansion, the market for loanable funds and the PPF
2.2.2 Artificial interest-rates and the structure of production
2.2.3 Boom and Bust
3 The Subprime Crisis and the Austrian Theory
3.1 Monetary policy and regulation before and during the crisis
3.2 Application of the theory
3.3 Evaluation of the Subprime crisis
4 Conclusion
Research Objectives and Themes
This paper aims to analyze the relationship between monetary policy and economic crises, specifically the Subprime Crisis in the USA, through the lens of the Austrian theory of the business cycle. By employing the capital-based macroeconomics model, the study investigates how artificially low interest rates and government regulations lead to unsustainable market fluctuations and recessions.
- The Austrian theory of the business cycle and its historical foundations.
- The capital-based macroeconomics model and its components.
- The impact of expansionary monetary policy on intertemporal resource allocation.
- Governmental roles and regulations leading up to the U.S. Subprime Crisis.
- The process of boom, malinvestment, and subsequent economic bust.
Excerpt from the Book
2.2.3 Boom and Bust
Business cycles are short-term fluctuations in business activity. They are up- and downswings in economic growth-rates. Booms, on the one hand, are periods of accelerated growth and rapid economic expansion. Increases in employment, profits, consumption and investment activity accompany those upswings. They are times of general economic enthusiasm. Busts, on the other hand, are periods of recession. Growth-rates decline. It is even possible that there is a general economic contraction, that is, that growth-rates are negative. Macroeconomic variables that increase during the boom decrease during the bust phase. (See MANKIW; TAYLOR 2008, pp. 820-821)
The Austrian theory of the business cycle is a monetary theory. An increase in the amount of money causes boom and bust to occur. The interest-rate falls below the natural rate of interest if banks lend out the additional money supply to businessmen in the form of credit. The relative price of production goods rises. Entrepreneurs think that longer production processes are more profitable and that there are enough resources to carry them out. (See GARRISON 2006, p. 68; See HAYEK 2008b, pp. 266-268; See MISES 2012, p. 553)
Summary of Chapters
1 Introduction: This chapter outlines the research motivation regarding the Subprime Crisis and introduces the Austrian business cycle theory as the primary analytical framework.
2 The Austrian Theory of the Business Cycle: This chapter details the foundational concepts of capital-based macroeconomics, including the market for loanable funds, the PPF, and the stages of production, leading to an explanation of the boom-bust cycle.
3 The Subprime Crisis and the Austrian Theory: This chapter applies the previously defined theoretical framework to analyze how specific government regulations and FED monetary policies contributed to the U.S. housing bubble and subsequent financial collapse.
4 Conclusion: This chapter summarizes the findings, arguing that monetary expansion is a primary cause of economic instability and that central banks should avoid excessive stimulation.
Keywords
Austrian economics, business cycle, monetary policy, Subprime Crisis, capital-based macroeconomics, interest rates, malinvestment, boom and bust, Federal Reserve, economic recession, production structure, loanable funds, government regulation, financial stability, time preference.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the relationship between monetary policy and economic crises, specifically using the Austrian theory of the business cycle to explain the U.S. Subprime Crisis.
What are the core thematic areas?
Key themes include capital-based macroeconomics, the impact of artificial interest rates, government intervention in housing, and the structural causes of economic booms and busts.
What is the main research question?
The study investigates whether expansionary monetary policy can effectively counter economic crises and whether it contributes to sustainable prosperity or causes systemic instability.
Which scientific methodology is employed?
The paper utilizes the capital-based macroeconomics model developed by Roger Garrison to illustrate the theoretical concepts and analyze historical economic data related to the Subprime Crisis.
What topics are discussed in the main body?
The main body covers the theoretical pillars of the Austrian approach, the mechanics of monetary expansion, the history of U.S. housing policy, and an evaluation of the Subprime Crisis as a classic example of policy-induced economic cycle.
Which keywords best characterize the work?
The work is characterized by terms like Austrian economics, business cycle, malinvestment, Subprime Crisis, and monetary expansion.
How does the Austrian theory define a boom?
According to this theory, a boom is an unsustainable period of expansion driven by artificially low interest rates, leading to malinvestments in incorrect lines of production.
What role did government institutions like Fannie Mae play?
These institutions provided implicit subsidies and encouraged excessive lending to low-income applicants, which significantly contributed to the development of the Subprime mortgage market.
- Citar trabajo
- Tino Förster (Autor), 2014, Monetary Policy and The Subprime Crisis. An Austrian Approach, Múnich, GRIN Verlag, https://www.grin.com/document/279914
