Accounting for the business cycle: Nominal rigidities, factor heterogeneity, and Austrian capital theoryRobert Mulligan () The Review of Austrian Economics, 2006, vol. 19, issue 4, pages 311-336 Abstract: An Austrian interpretation of the New Keynesian small menu cost model of the business cycle is proposed. Austrian and New Keynesian business cycle theories share the feature that the cycle is generated by rigidities which prevent the economy from adapting instantaneously to changing conditions. Austrian business cycle theory is capital-based, focusing on credit expansion which artificially lowers interest rates and causes an investment boom and unsustainable business expansion. In contrast, the New Keynesian small menu cost model of the business cycle is based on nominal rigidities which prevent markets from clearing. Small menu costs introduce dichotomous behavior, where firms find it locally optimal to avoid instantaneous output price adjustments in the face of the cost, but this local optimum results in economy-wide output and employment fluctuations which are much greater in relative magnitude. The small menu cost model of the business cycle is extended and reinterpreted in light of Austrian business cycle theory with heterogeneous, multiply-specific capital, thus providing a rigorous formalization of the Austrian business cycle. The Austrian interpretation of this New Keynesian model fortuitously addresses several of its shortcomings. Copyright Springer Science + Business Media, LLC 2006 Keywords: Austrian business cycle theory; New Keynesian small menu cost model; Hayekian triangle (search for similar items in EconPapers) Downloads: (external link) Related works: Access Statistics for this article More articles in The Review of Austrian Economics from Springer |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
Econpapers is hosted by the
Swedish Business School at Örebro University.