The Austrian Business Cycle Theory: VAR Analysis for USA between 1978-2013

The aim of this paper is to empirically investigate the explanatory power of Austrian business cycle theory (ABCT). My dataset consists of US quarterly time series within the period 1978–2013. Following Wainhouse (1984), Keeler (2001) and others I employ Granger causality as one of the primary tools of the analysis. Furthermore I also add impulse response functions to analyse the observed relations in closer detail. Two main hypotheses were tested. First one analyses how changes in interest rate affects relative proportion of investment and consumption outlays. Second hypothesis investigates how labour resources are reallocated as a consequence of an increase in interest rate. In both hypotheses, two concepts of interest rate were employed. Application of “explicit” interest rate does not seem to generate significant results. On the contrary, results fit in the Austrian story much better when implicit rate is employed. The traditional version of ABCT, which relies more on explicit interest rates, seems to suffer from invalid assumption about the allocation of credit during expansionary phase of business cycle.