What is the Austrian Business Cycle Theory?
The Austrian Business Cycle Theory states that the business cycle can be manipulated, and even predicted, by analysts when a federal bank seeks to control monetary policy by artificially adjusting the interest rate. While the theory states that such manipulation can cause the economy to boom, it can also cause it to crash. Thus, the Austrian Business Cycle Theory notes these policies can be the cause of great harm.
The Austrian Business Cycle Theory states that the business cycle can be manipulated, and even predicted, by analysts when a federal bank seeks to control monetary policy by artificially adjusting the interest rate. While the theory states that such manipulation can cause the economy to boom, it can also cause it to crash. Thus, the Austrian Business Cycle Theory notes these policies can be the cause of great harm. In the normal course of events, a national bank, such as the U.S. Federal Reserve, keeps a tight control on the interest rate or, more appropriately, several different interest rates. This is done to spur the economy and control the economy so that it does not get too hot too quickly. Ironically, the very thing that the Austrian Business Cycle Theory says such policies cause, an extreme business cycle, is what they are trying to prevent.
