Mario Rizzo has an excellent post on Austrian Business Cycle Theory (ABCT). I think Mario do a good job explaining what ABCT is and what it is not.
At the centre of Mario’s discussion is that monetary policy is not neutral, but that the important think is not inflation, but rather “relative inflation”. Here is Mario:
The Austrian theory rests, not on a catalyzing effect of core inflation or headline inflation, but on changes inrelative prices that cause resources to be allocated in ultimately unsustainable ways. The Great Depression was not preceded by much inflation because productivity improvements allowed for increases in bank credit without increasing (by much) the price level. Hayek said repeatedly that the price level aggregate can hide the distortions basic to the cycle.
This point is especially important in the early stages of recovery when there is so much unused capacity and previous investment pessimism…
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