RISK AND BUSINESS CYCLES  
New and Old Austrian Perspectives  

Tyler Cowen

London and New York  

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  CONTENTS  
  List of figures and tables   vii  


  Acknowledgements   viii  


  1 INTRODUCTION   1  


  The problem   1  


  Some assumptions   6  


  New and old Austrian perspectives   10  


  2 A RISK-BASED THEORY IN REAL TERMS   13  


  Why a central role for risk?   13  


  Framework and assumptions   16  


  Induced increases in risk   24  


  Volatility and immediate business cycle contractions   36  


  3 A RISK-BASED THEORY IN MONETARY TERMS   44  


  Two basic monetary scenarios   44  

   What stylized facts does this chapter seek to explain?   45  


  How money affects investment when banks ration credit   47  


  Monetary policy issues   53  


  Transmission of cycles across currencies   60  


  Foundational issues: why does money matter?   64  


  4 BUSINESS CYCLES WITHOUT RATIONAL EXPECTATIONS: THE
TRADITIONAL APPROACH OF THE AUSTRIAN SCHOOL   76  


  The traditional Austrian claim   76  


  Postulating especially costly errors   81  


  Inflation vs. inflationary volatility   83  


  Is inflation confused with changes in consumer savings?   84  


  Confusing inflation with changes in investment demand   85  


  Do interest rates provide useful information about consumer
demand?   88  


  Do other signal extraction problems counteract the Austrian
claim?   90  


-v
Does the term structure of interest rates signal inflation to investors?
  92  

   Are the new investments sustainable?   94  


  Concluding remarks on the traditional Austrian theory   101  


  Comparison with the risk-based theory   102  


  Appendix A Forced savings   105  


  Appendix B The Ricardo effect   107  


  Appendix C Capital-intensity and the Cambridge debates   108  


  5 EMPIRICAL EVIDENCE   115  


  Introduction   115  


  Does money affect real interest rates?   117  


  Money, credit, and the bank lending channel   123  


  Does monetary policy induce sectoral shifts?   131  


  How does inflation affect stock returns?  134  


  Do monetary variables predict investment?   139  


  How do uncertainty and volatility affect investment?   142  


  Are capital-intensive investments more cyclical?   146
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