Investment dynamics in a Hayekian framework

Przemysław Rapka

Chapter 10 in Hayek’s Living Legacy in Economics, Philosophy and Policy, 2026, pp 170-188 from Edward Elgar Publishing

Abstract: Standard macroeconomic theory assumes that investment spending varies inversely with the interest rate. In reality, this is not the case. Despite the central bank raising interest rates, the economic boom can continue for a long time. This can be explained by F. A. Hayek's theoretical framework. First, within the macroeconomic structure of production, the investments of individual firms are complementary. Second, the lowering of the interest rate induces some firms to make long-term investments. This, in turn, means an increase in the demand for non-specific and complementary factors of production provided by other firms. For this reason, initial investment in long-term projects causes investment demand to remain elevated for some time. A subsequent rise in interest rates does not necessarily lead to a rapid slowdown of economic activity. The higher interest rates make it rather more profitable to increase investment in working capital, instead of starting long-term investment projects.

Keywords: Interest Rate; Investment; Structure of Production; Investment Spending; Central Bank; Economic Boom (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035394234
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