Monetary Policy as bad medicine: The volatile relationship between business cycles and asset prices
In this article published in Review of Austrian Economics, 21 (4) 2008: 283-300, I discuss the connection between Austrian Business Cycle Theory and asset prices, especially asset price bubbles.
Austrian business cycle theory has become an important point of focus in controversial mainstream discussions regarding the role of asset prices for monetary policy. In this article the relation between asset prices and the Austrian business cycle theory is examined. The analysis focuses on how central banking supports optimism, resulting in the redirection of entrepreneurial activity and knowledge via asset price bubbles. The crucial role of credit expansion for asset price booms is also analyzed. Following this analysis, the implications for monetary policy are deduced.
Key words: Austrian business cycle theory, asset prices, asset price bubble, herding behavior, credit expansion, monetary policy
B 53, E 32, E 44, E 58