June, 2016

An Austrian Business Cycle Parable

An Educational Note
  • Solomon Stein

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Howard Baetjer

    Lecturer, Department of Economics, Towson University
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Find the paper at SpringerLink.

This paper presents a short narrative example intended for use in teaching the Austrian Business Cycle Theory, meant to complement theoretical presentations by presenting an idealized account of an individual entrepreneur operating over time and responding to various possible evolutions of the interest rate. In particular, the similarity from the point of view of the entrepreneur between a reduction in the interest rate due to an increase in consumer saving and a similar reduction due to monetary policy is emphasized. Along with the narrative itself, we discuss the motivating version of the Austrian Business Cycle behind the narrative, as well as offer commentary as explanation for the particular choices made in its construction.