The optimal Austrian business cycle theory

Alexander W. Salter, William J. Luther

Research output: Contribution to journalReview articlepeer-review

11 Scopus citations


Since Hayek's pioneering work in the 1930s, the Austrian business cycle theory (ABCT) has been presented as a disequilibrium theory populated by less-than-perfectly rational agents. In contrast, we maintain that (1) the Austrian business cycle theory is consistent with rational expectations and (2) the post-boom adjustment process can be understood in an equilibrium framework. Hence, we offer a new interpretation of the existing theory. In doing so, we also address concerns raised with Garrison's (2001) diagrammatic approach, wherein the economy moves beyond the production possibilities frontier. Our interpretation might accurately be described as a monetary disequilibrium approach grounded in an implicit general equilibrium framework with positive costs of reallocation.

Original languageEnglish
Pages (from-to)45-60
Number of pages16
JournalAdvances in Austrian Economics
StatePublished - 2016


  • Austrian
  • Business cycle
  • Macroeconomic fluctuation
  • Rational expectations
  • Reallocation costs
  • Structure of production


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